COMMENTARY ON Articles 23 A AND 23 B

CONCERNING THE METHODS FOR ELIMINATION OF DOUBLE TAXATION

Preliminary remarksThe scope of the Articles1. These Articles deal with the so-called juridical double taxation where the same income or capital is taxable in the hands of the same person by more than one State.(Amended on 11 April 1977 see History)

2. This case has to be distinguished especially from the so-called economic double taxation,i.e.where two different persons are taxable in respect of the same income or capital. If two States wish to solve problems of economic double taxation, they must do so in bilateral negotiations.(Amended on 11 April 1977 see History)

3. International juridical double taxation may arise in three cases:where each Contracting State subjects the same person to tax on his worldwide income or capital (concurrent full liability to tax, see paragraph 4 below);

where a person is a resident of a Contracting State (R)[^68] and derives income from, or owns capital in, the other Contracting State (S or E) and both States impose tax on that income or capital (see paragraph 5 below);

where each Contracting State subjects the same person, not being a resident of either Contracting State to tax on income derived from, or capital owned in, a Contracting State; this may result, for instance, in the case where a non-resident person has a permanent establishment in one Contracting State (E) through which he derives income from, or owns capital in, the other Contracting State (S) (concurrent limited tax liability, see paragraph 11below).

(Amended on 29 April 2000 see History)

4. The conflict in case a) is reduced to that of case b) by virtue of Article 4. This is because that Article defines the term “resident of a Contracting State” by reference to the liability to tax of a person under domestic law by reason of his domicile, residence, place of management or any other criterion of a similar nature (paragraph 1 of Article 4) and by listing special criteria for the case of double residence to determine which of the two States is the State of residence (R) within the meaning of the Convention (paragraphs 2 and 3 of Article 4).(Replaced on 11 April 1977 see History)

4.1 Article 4, however, only deals with cases of concurrent full liability to tax. The conflict in case a) may therefore not be solved if the same item of income is subject to the full liability to tax of two countries but at different times. The following example illustrates that problem. Assume that a resident of State R1 derives a taxable benefit from an employee stock-option that is granted to that person. State R1 taxes that benefit when the option is granted. The person subsequently becomes a resident of State R2, which taxes the benefit at the time of its subsequent exercise. In that case, the person is taxed by each State at a time when he is a resident of that State and Article 4does not deal with the issue as there is no concurrent residence in the two States.(Added on 15 July 2005 see History)

4.2 The conflict in that situation will be reduced to that of case b)and solved accordingly to the extent that the employment services to which the option relates have been rendered in one of the Contracting States so as to be taxable by that State under Article 15 because it is the State where the relevant employment is exercised. Indeed, in such a case, the State in which the services have been rendered will be the State of source for purposes of elimination of double taxation by the other State. It does not matter that the first State does not levy tax at the same time (see paragraph 32.8). It also does not matter that that State considers that it levies tax as a State of residence as opposed to a State of source (see the last sentence of paragraph 8).(Added on 15 July 2005 see History)

4.3 Where, however, the relevant employment services have not been rendered in either State, the conflict will not be one of source-residence double taxation. The mutual agreement procedure could be used to deal with such a case. One possible basis to solve the case would be for the competent authorities of the two States to agree that each State should provide relief as regards the residence-based tax that was levied by the other State on the part of the benefit that relates to services rendered during the period while the employee was a resident of that other State. Thus, in the above example, if the relevant services were rendered in a third State before the person became a resident of State R2, it would be logical for the competent authority of State R2 to agree to provide relief (either through the credit or exemption method) for the State R1 tax that has been levied on the part of the employment benefit that relates to services rendered in the third State since, at the time when these services were rendered, the taxpayer was a resident of State R1 and not of State R2 for purposes of the convention between these two States.(Added on 15 July 2005 see History)

5. The conflict in case b) may be solved by allocation of the right to tax between the Contracting States. Such allocation may be made by renunciation of the right to tax either by the State of source or situs (S) or of the situation of the permanent establishment (E), or by the State of residence (R), or by a sharing of the right to tax between the two States. The provisions of the Chapters III and IV of the Convention, combined with the provisions of Article 23 A or 23 B, govern such allocation.(Amended on 29 April 2000 see History)

6. For some items of income or capital, an exclusive right to tax is given to one of the Contracting States, and the relevant Article states that the income or capital in question “shall be taxable only” in a Contracting State.[^69] The words “shall be taxable only” in a Contracting State preclude the other Contracting State from taxing, thus double taxation is avoided. The State to which the exclusive right to tax is given is normally the State of which the taxpayer is a resident within the meaning of Article 4, that is State R, but in four Articles[^70] the exclusive right may be given to the other Contracting State (S) of which the taxpayer is not a resident within the meaning of Article 4.(Amended on 17 July 2008 see History)

7. For other items of income or capital, the attribution of the right to tax is not exclusive, and the relevant Article then states that the income or capital in question “may be taxed” in the Contracting State (S or E) of which the taxpayer is not a resident within the meaning of Article 4. In such case the State of residence (R) must give relief so as to avoid the double taxation. Paragraphs 1and 2 of Article 23 A and paragraph 1 of Article 23 B are designed to give the necessary relief.(Replaced on 11 April 1977 see History)

8. Articles 23 A and 23 B apply to the situation in which a resident of State R derives income from, or owns capital in, the other Contracting State E or S (not being the State of residence within the meaning of the Convention) and that such income or capital, in accordance with the Convention, may be taxed in such other State E or S. The Articles, therefore, apply only to the State of residence and do not prescribe how the other Contracting State E or S has to proceed.(Replaced on 11 April 1977 see History)

9. Where a resident of the Contracting State R derives income from the same State R through a permanent establishment which he has in the other Contracting State E, State E may tax such income (except income from immovable property situated in State R) if it is attributable to the said permanent establishment (paragraph 2 of Article 21). In this instance too, State R must give relief under Article 23 A or Article 23 Bfor income attributable to the permanent establishment situated in State E, notwithstanding the fact that the income in question originally arises in State R (see paragraph 5 of the Commentary on Article 21). However, where the Contracting States agree to give to State R which applies the exemption method a limited right to tax as the State of source of dividends or interest within the limits fixed in paragraph 2 of the Article 10 or 11 (see paragraph 5 of the Commentary on Article 21), then the two States should also agree upon a credit to be given by State E for the tax levied by State R, along the lines of paragraph 2 of Article 23 A or of paragraph 1 of Article 23 B.(Amended on 29 April 2000 see History)

10. Where a resident of State R derives income from a third State through a permanent establishment which he has in State E, such State E may tax such income (except income from immovable property situated in the third State) if it is attributable to such permanent establishment (paragraph 2 of Article 21). State R must give relief under Article 23 A or Article 23 B in respect of income attributable to the permanent establishment in State E. There is no provision in the Convention for relief to be given by Contracting State E for taxes levied in the third State where the income arises; however, under paragraph 3 of Article 24 any relief provided for in the domestic laws of State E (double taxation conventions excluded) for residents of State E is also to be granted to a permanent establishment in State E of an enterprise of State R (see paragraphs 67 to 72 of the Commentary on Article 24).(Amended on 17 July 2008 see History)

11. The conflict in case c) of paragraph 3 above is outside the scope of the Convention as, under Article 1, it applies only to persons who are residents of one or both of the States. It can, however, be settled by applying the mutual agreement procedure (see also paragraph 10above).(Replaced on 11 April 1977 see History)

Description of methods for elimination of double taxation12. In the existing conventions, two leading principles are followed for the elimination of double taxation by the State of which the taxpayer is a resident. For purposes of simplicity, only income tax is referred to in what follows; but the principles apply equally to capital tax.(Renumbered and amended on 11 April 1977 see History)

The principle of exemption13. Under the principle of exemption, the State of residence R does not tax the income which according to the Convention may be taxed in State E or S (nor, of course, also income which shall be taxable only in State E or S; see paragraph 6above).(Replaced on 11 April 1977 see History)

14. The principle of exemption may be applied by two main methods:the income which may be taxed in State E or S is not taken into account at all by State R for the purposes of its tax; State R is not entitled to take the income so exempted into consideration when determining the tax to be imposed on the rest of the income; this method is called “full exemption”;

the income which may be taxed in State E or S is not taxed by State R, but State R retains the right to take that income into consideration when determining the tax to be imposed on the rest of the income; this method is called “exemption with progression”.

(Renumbered and amended on 11 April 1977 see History)

The principle of credit15. Under the principle of credit, the State of residence R calculates its tax on the basis of the taxpayer's total income including the income from the other State E or S which, according to the Convention, may be taxed in that other State (but not including income which shall be taxable only in State S; see paragraph 6above). It then allows a deduction from its own tax for the tax paid in the other State.(Renumbered and amended on 11 April 1977 see History)

16. The principle of credit may be applied by two main methods:State R allows the deduction of the total amount of tax paid in the other State on income which may be taxed in that State, this method is called “full credit”;

the deduction given by State R for the tax paid in the other State is restricted to that part of its own tax which is appropriate to the income which may be taxed in the other State; this method is called “ordinary credit”.

(Renumbered and amended on 11 April 1977 see History)

17. Fundamentally, the difference between the methods is that the exemption methods look at income, while the credit methods look at tax.(Renumbered and amended on 11 April 1977 see History)

Operation and effects of the methods18. An example in figures will facilitate the explanation of the effects of the various methods. Suppose the total income to be 100,000, of which 80,000 is derived from one State (State of residence R) and 20,000 from the other State (State of source S). Assume that in State R the rate of tax on an income of 100,000 is 35 per cent and on an income of 80,000 is 30 per cent. Assume further that in State S the rate of tax is either 20 per cent — case (i) — or 40 per cent — case (ii) — so that the tax payable therein on 20,000 is 4,000 in case (i) or 8,000 in case (ii),respectively.(Renumbered and amended on 11 April 1977 see History)

19. If the taxpayer's total income of 100,000 arises in State R, his tax would be 35,000. If he had an income of the same amount, but derived in the manner set out above, and if no relief is provided for in the domestic laws of State R and no conventions exists between State R and State S, then the total amount of tax would be, in case (i): 35,000 plus 4,000 = 39,000, and in case (ii): 35,000 plus 8,000 = 43,000.(Renumbered and amended on 11 April 1977 see History)

Exemption methods20. Under the exemption methods, State R limits its taxation to that part of the total income which, in accordance with the various Articles of the Convention, it has a right to tax,i.e.80,000.a) Full exemptionState R imposes tax on 80,000 at the rate of tax applicable to 80,000,i.e.at 30 per cent.

Case (i)

Case (ii)

Tax in State R, 30% of 80,000

24,000

24,000

Plus tax in State S

4,000

8,000

Total taxes

28,000

32,000

Relief has been given by State R in the amount of

11,000

11,000

b) Exemption with progressionState R imposes tax on 80,000 at the rate of tax applicable to total income wherever it arises (100,000),i.e.at 35 per cent.

Case (i)

Case (ii)

Tax in State R, 35% of 80,000

28,000

28,000

Plus tax in State S

4,000

8,000

Total taxes

32,000

36,000

Relief has been given by State R in the amount of

7,000

7,000

(Renumbered and amended on 11 April 1977 see History)

21. In both cases, the level of tax in State S does not affect the amount of tax given up by State R. If the tax on the income from State S is lower in State S than the relief to be given by State R — cases a (i), a (ii), and b (i) — then the taxpayer will fare better than if his total income were derived solely from State R. In the converse case — case b (ii) — the taxpayer will be worse off.(Replaced on 11 April 1977 see History)

22. The example shows also that the relief given where State R applies the full exemption method may be higher than the tax levied in State S, even if the rates of tax in State S are higher than those in State R. This is due to the fact that under the full exemption method, not only the tax of State R on the income from State S is surrendered (35 per cent of 20,000 = 7,000; as under the exemption with progression), but that also the tax on remaining income (80,000) is reduced by an amount corresponding to the differences in rates at the two income levels in State R (35 less 30 = 5 per cent applied to 80,000 = 4,000).(Replaced on 11 April 1977 see History)

Credit methods23. Under the credit methods, State R retains its right to tax the total income of the taxpayer, but against the tax so imposed, it allows a deduction.a) Full creditState R computes tax on total income of 100,000 at the rate of 35 per cent and allows the deduction of the tax due in State S on the income from S.

Case (i)

Case (ii)

Tax in State R, 35% of 100,000

35,000

35,000

less tax in State S

• 4,000

• 8,000

Tax due

31,000

27,000

Total taxes

35,000

35,000

Relief has been given by State R in the amount of

4,000

8,000

b) Ordinary creditState R computes tax on total income of 100,000 at the rate of 35 per cent and allows the deduction of the tax due in State S on the income from S, but in no case it allows more than the portion of tax in State R attributable to the income from S (maximum deduction). The maximum deduction would be 35 per cent of 20,000 = 7,000.

Case (i)

Case (ii)

Tax in State R, 35% of 100,000

35,000

35,000

less tax in State S

• 4,000

less maximum tax

• 7,000

Tax due

31,000

28,000

Total taxes

35,000

36,000

Relief has been given by State R in the amount of

4,000

7,000

(Amended on 23 July 1992 see History)

24. A characteristic of the credit methods compared with the exemption methods is that State R is never obliged to allow a deduction of more than the tax due in State S.(Renumbered and amended on 11 April 1977 see History)

25. Where the tax due in State S is lower than the tax of State R appropriate to the income from State S (maximum deduction), the taxpayer will always have to pay the same amount of taxes as he would have had to pay if he were taxed only in State R,i.e.as if his total income were derived solely from State R.(Renumbered and amended on 11 April 1977 see History)

26. The same result is achieved, where the tax due in State S is the higher while State R applies the full credit, at least as long as the total tax due to State R is as high or higher than the amount of the tax due in State S.(Renumbered and amended on 11 April 1977 see History)

27. Where the tax due in State S is higher and where the credit is limited (ordinary credit), the taxpayer will not get a deduction for the whole of the tax paid in State S. In such event the result would be less favourable to the taxpayer than if his whole income arose in State R, and in these circumstances the ordinary credit method would have the same effect as the method of exemption with progression.Table 23-1 Total amount of tax in the different cases illustrated aboveA.  All income arising in State R

Total tax = 35,000

B.  Income arising in two States, viz.

80,000 in State R and 20,000

in State S

Total tax if tax in State S is

4,000 (case (i))

8,000 (case (ii))

No convention (19)[^71]

39,000

43,000

Full exemption (20a)

28,000

32,000

Exemption with progression (20b)

32,000

36,000

Full credit (23a)

35,000

35,000

Ordinary credit (23b)

35,000

36,000

Table 23-2 Amount of tax given up by the state of residence

If tax in State S is

4,000 (case (i))

8,000 (case (ii))

No convention

0

0

Full exemption (20a)[^72]

11,000

11,000

Exemption with progression (20b)

7,000

7,000

Full credit (23a)

4,000

8,000

Ordinary credit (23b)

4,000

7,000

(Renumbered and amended on 11 April 1977 see History)

The methods proposed in the Articles28. In the conventions concluded between OECD member countries both leading principles have been followed. Some States have a preference for the first one, some for the other. Theoretically a single principle could be held to be more desirable, but, on account of the preferences referred to, each State has been left free to make its own choice.(Renumbered and amended on 11 April 1977 see History)

29. On the other hand, it has been found important to limit the number of methods based on each leading principle to be employed. In view of this limitation, the Articles have been drafted so that member countries are left free to choose between two methods:

• the exemption method with progression (Article 23 A), and

• the ordinary credit method (Article 23 B).

(Renumbered and amended on 11 April 1977 see History)

30. If two Contracting States both adopt the same method, it will be sufficient to insert the relevant Article in the convention. On the other hand, if the two Contracting States adopt different methods, both Articles may be amalgamated in one, and the name of the State must be inserted in each appropriate part of the Article, according to the method adopted by that State.(Amended on 11 April 1977 see History)

31. Contracting States may use a combination of the two methods. Such combination is indeed necessary for a Contracting State R which generally adopts the exemption method in the case of income which under Articles 10 and 11 may be subjected to a limited tax in the other Contracting State S. For such case, Article 23 A provides in paragraph 2 a credit for the limited tax levied in the other Contracting State S (adjustments to paragraphs 1 and 2 of Article 23 A may, however, be required in the case of distributions from Real Estate Investment Trusts (REITs) where provisions similar to those referred to in paragraphs 67.1 to 67.7 of the Commentary on Article 10 have been adopted by the Contracting States). Moreover, States which in general adopt the exemption method may wish to exclude specific items of income from exemption and to apply to such items the credit method. In such case, paragraph 2 of Article 23 A could be amended to include these items of income.(Amended on 17 July 2008 see History)

31.1 One example where paragraph 2 could be so amended is where a State that generally adopts the exemption method considers that that method should not apply to items of income that benefit from a preferential tax treatment in the other State by reason of a tax measure that has been introduced in that State after the date of signature of the Convention. In order to include these items of income, paragraph 2 could be amended as follows:2. Where a resident of a Contracting State derives an item of income whichin accordance with the provisions of Articles 10 and 11, may be taxed in the other Contracting State, or

in accordance with the provisions of this Convention, may be taxed in the other Contracting State but which benefits from a preferential tax treatment in that other State by reason of a tax measure

that has been introduced in the other Contracting State after the date of signature of the Convention, and

in respect of which that State has notified the competent authorities of the other Contracting State, before the item of income is so derived and after consultation with that other State, that this paragraph shall apply,

the first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to such item of income derived from that other State.

(Added on 28 January 2003 see History)

32. The two Articles are drafted in a general way and do not give detailed rules on how the exemption or credit is to be computed, this being left to the domestic laws and practice applicable. Contracting States which find it necessary to settle any problem in the Convention itself are left free to do so in bilateral negotiations.(Replaced on 11 April 1977 see History)

Conflicts of qualification32.1 Both Articles 23 A and 23 Brequire that relief be granted, through the exemption or credit method, as the case may be, where an item of income or capital may be taxed by the State of source in accordance with the provisions of the Convention. Thus, the State of residence has the obligation to apply the exemption or credit method in relation to an item of income or capital where the Convention authorises taxation of that item by the State of source.(Added on 29 April 2000 see History)

32.2 The interpretation of the phrase “in accordance with the provisions of this Convention, may be taxed”, which is used in both Articles, is particularly important when dealing with cases where the State of residence and the State of source classify the same item of income or capital differently for purposes of the provisions of the Convention.(Added on 29 April 2000 see History)

32.3 Different situations need to be considered in that respect. Where, due to differences in the domestic law between the State of source and the State of residence, the former applies, with respect to a particular item of income or capital, provisions of the Convention that are different from those that the State of residence would have applied to the same item of income or capital, the income is still being taxed in accordance with the provisions of the Convention, as interpreted and applied by the State of source. In such a case, therefore, the two Articles require that relief from double taxation be granted by the State of residence notwithstanding the conflict of qualification resulting from these differences in domestic law.(Added on 29 April 2000 see History)

32.4 This point may be illustrated by the following example. A business is carried on through a permanent establishment in State E by a partnership established in that State. A partner, resident in State R, alienates his interest in that partnership. State E treats the partnership as fiscally transparent whereas State R treats it as taxable entity. State E therefore considers that the alienation of the interest in the partnership is, for the purposes of its Convention with State R, an alienation by the partner of the underlying assets of the business carried on by the partnership, which may be taxed by that State in accordance with paragraph 1 or 2of Article 13. State R, as it treats the partnership as a taxable entity, considers that the alienation of the interest in the partnership is akin to the alienation of a share in a company, which could not be taxed by State E by reason of paragraph 5 of Article 13. In such a case, the conflict of qualification results exclusively from the different treatment of partnerships in the domestic laws of the two States and State E must be considered by State R to have taxed the gain from the alienation “in accordance with the provisions of the Convention” for purposes of the application of Article 23 A or Article 23 B. State R must therefore grant an exemption pursuant to Article 23 A or give a credit pursuant to Article 23 Birrespective of the fact that, under its own domestic law, it treats the alienation gain as income from the disposition of shares in a corporate entity and that, if State E's qualification of the income were consistent with that of State R, State R would not have to give relief under Article 23 A or Article 23 B. No double taxation will therefore arise in such a case.(Amended on 28 January 2003 see History)

32.5 Article 23 A and Article 23 B, however, do not require that the State of residence eliminate double taxation in all cases where the State of source has imposed its tax by applying to an item of income a provision of the Convention that is different from that which the State of residence considers to be applicable. For instance, in the example above, if, for purposes of applying paragraph 2 of Article 13, State E considers that the partnership carried on business through a fixed place of business but State R considers that paragraph 5 applies because the partnership did not have a fixed place of business in State E, there is actually a dispute as to whether State E has taxed the income in accordance with the provisions of the Convention. The same may be said if State E, when applying paragraph 2 of Article 13, interprets the phrase “forming part of the business property” so as to include certain assets which would not fall within the meaning of that phrase according to the interpretation given to it by State R. Such conflicts resulting from different interpretation of facts or different interpretation of the provisions of the Convention must be distinguished from the conflicts of qualification described in the above paragraph where the divergence is based not on different interpretations of the provisions of the Convention but on different provisions of domestic law. In the former case, State R can argue that State E has not imposed its tax in accordance with the provisions of the Convention if it has applied its tax based on what State R considers to be a wrong interpretation of the facts or a wrong interpretation of the Convention. States should use the provisions of Article 25 (Mutual Agreement Procedure), and in particular paragraph 3 thereof, in order to resolve this type of conflict in cases that would otherwise result in unrelieved double taxation.(Amended on 28 January 2003 see History)

32.6 The phrase “in accordance with the provisions of this Convention, may be taxed” must also be interpreted in relation to possible cases of double non-taxation that can arise under Article 23 A. Where the State of source considers that the provisions of the Convention preclude it from taxing an item of income or capital which it would otherwise have had the right to tax, the State of residence should, for purposes of applying paragraph 1 of Article 23 A, consider that the item of income may not be taxed by the State of source in accordance with the provisions of the Convention, even though the State of residence would have applied the Convention differently so as to have the right to tax that income if it had been in the position of the State of source. Thus the State of residence is not required by paragraph 1 to exempt the item of income, a result which is consistent with the basic function of ArticleXREFSTYLE=ArticleLabel23 only 23which is to eliminate double taxation.(Amended on 17 July 2008 see History)

32.7 This situation may be illustrated by reference to a variation of the example described above. A business is carried on through a fixed place of business in State E by a partnership established in that State and a partner, resident in State R, alienates his interest in that partnership. Changing the facts of the example, however, it is now assumed that State E treats the partnership as a taxable entity whereas State R treats it as fiscally transparent; it is further assumed that State R is a State that applies the exemption method. State E, as it treats the partnership as a corporate entity, considers that the alienation of the interest in the partnership is akin to the alienation of a share in a company, which it cannot tax by reason of paragraph 5 of Article 13. State R, on the other hand, considers that the alienation of the interest in the partnership should have been taxable by State E as an alienation by the partner of the underlying assets of the business carried on by the partnership to which paragraph 1 or 2of Article 13 would have been applicable. In determining whether it has the obligation to exempt the income under paragraph 1 of Article 23 A, State R should nonetheless consider that, given the way that the provisions of the Convention apply in conjunction with the domestic law of State E, that State may not tax the income in accordance with the provisions of the Convention. State R is thus under no obligation to exempt the income.(Amended on 28 January 2003 see History)

Timing mismatch32.8 The provisions of the Convention that allow the State of source to tax particular items of income or capital do not provide any restriction as to when such tax is to be levied (see, for instance, paragraph 2.2 of the Commentary on Article 15). Since both Articles 23 A and 23 B require that relief be granted where an item of income or capital may be taxed by the State of source in accordance with the provisions of the Convention, it follows that such relief must be provided regardless of when the tax is levied by the State of source. The State of residence must therefore provide relief of double taxation through the credit or exemption method with respect to such item of income or capital even though the State of source taxes it in an earlier or later year. Some States, however, do not follow the wording of Article 23 A or 23 B in their bilateral conventions and link the relief of double taxation that they give under tax conventions to what is provided under their domestic laws. These countries, however, would be expected to seek other ways (the mutual agreement procedure, for example) to relieve the double taxation which might otherwise arise in cases where the State of source levies tax in a different taxation year.(Added on 15 July 2005 see History)

Commentary on the provisions of Article 23 A (exemption method)Paragraph 1The obligation of the State of residence to give exemption33. In the Article it is laid down that the State of residence R shall exempt from tax income and capital which in accordance with the Convention “may be taxed” in the other State E or S.(Renumbered and amended on 11 April 1977 see History)

34. The State of residence must accordingly exempt income and capital which may be taxed by the other State in accordance with the Convention whether or not the right to tax is in effect exercised by that other State. This method is regarded as the most practical one since it relieves the State of residence from undertaking investigations of the actual taxation position in the other State.(Amended on 29 April 2000 see History)

34.1 The obligation imposed on the State of residence to exempt a particular item of income or capital depends on whether this item may be taxed by the State of source in accordance with the Convention. Paragraphs 32.1 to 32.7 above discuss how this condition should be interpreted. Where the condition is met, however, the obligation may be considered as absolute, subject to the exceptions of paragraphs 2 and 4 of Article 23 A. Paragraph 2 addresses the case, already mentioned in paragraph 31 above, of items of income which may only be subjected to a limited tax in the State of source. For such items of income, the paragraph provides for the credit method (see paragraph 47 below). Paragraph 4 addresses the case of certain conflicts of qualification which would result in double non-taxation as a consequence of the application of the Convention if the State of residence were obliged to give exemption (see paragraphs 56.1 to 56.3below).(Added on 29 April 2000 see History)

35. Occasionally, negotiating States may find it reasonable in certain circumstances, in order to avoid double non-taxation, to make an exception to the absolute obligation on the State of residence to give exemption in cases where neither paragraph 3 or 4 would apply. Such may be the case where no tax on specific items of income or capital is provided under the domestic laws of the State of source, or tax is not effectively collected owing to special circumstances such as the set-off of losses, a mistake, or the statutory time limit having expired. To avoid such double non-taxation of specific items of income, Contracting States may agree to amend the relevant Article itself (see paragraph 9 of the Commentary on Article 15 and paragraph 12 of the Commentary on Article 17; for the converse case where relief in the State of source is subject to actual taxation in the State of residence, see paragraph 20 of the Commentary on Article 10, paragraph 10 of the Commentary on Article 11, paragraph 6 of the Commentary on Article 12, paragraph 21 of the Commentary on Article 13 and paragraph 3 of the Commentary on Article 21). One might also make an exception to the general rule, in order to achieve a certain reciprocity, where one of the States adopts the exemption method and the other the credit method. Finally, another exception to the general rule may be made where a State wishes to apply to specific items of income the credit method rather than exemption (see paragraph 31 above).(Amended on 29 April 2000 see History)

36. (Deleted on 29 April 2000 see History)

Alternative formulation of the Article37. An effect of the exemption method as it is drafted in the Article is that the taxable income or capital in the State of residence is reduced by the amount exempted in that State. If in a particular State the amount of income as determined for income tax purposes is used as a measure for other purposes,e.g.social benefits, the application of the exemption method in the form proposed may have the effect that such benefits may be given to persons who ought not to receive them. To avoid such consequences, the Article may be altered so that the income in question is included in the taxable income in the State of residence. The State of residence must, in such cases, give up that part of the total tax appropriate to the income concerned. This procedure would give the same result as the Article in the form proposed. States can be left free to make such modifications in the drafting of the Article. If a State wants to draft the Article as indicated above, paragraph 1 may be drafted as follows:Where a resident of a Contracting State derives income or owns capital which, in accordance with the provisions of this Convention, shall be taxable only or may be taxed in the other Contracting State, the first-mentioned State shall, subject to the provisions of paragraph 2, allow as a deduction from the income tax or capital tax that part of the income tax or capital tax, respectively, which is applicable, as the case may be, to the income derived from or the capital owned in that other State.

If the Article is so drafted, paragraph 3 would not be necessary and could be omitted.(Amended on 11 April 1977 see History)

Miscellaneous problems38. Article 23 A contains the principle that the State of residence has to give exemption, but does not give detailed rules on how the exemption has to be implemented. This is consistent with the general pattern of the Convention. Articles 6 to 22 too lay down rules attributing the right to tax in respect of the various types of income or capital without dealing, as a rule, with the determination of taxable income or capital, deductions, rate of tax, etc. (see, however, Article 24). Experience has shown that many problems may arise. This is especially true with respect to Article 23 A. Some of them are dealt with in the following paragraphs. In the absence of a specific provision in the Convention, the domestic laws of each Contracting State are applicable. Some conventions contain an express reference to the domestic laws but of course this would not help where the exemption method is not used in the domestic laws. In such cases, Contracting States which face this problem should establish rules for the application of Article 23 A, if necessary, after having consulted with the competent authority of the other Contracting State (paragraph 3 of Article 25).(Amended on 22 July 2010 see History)

Amount to be exempted39. The amount of income to be exempted from tax by the State of residence is the amount which, but for the Convention, would be subjected to domestic income tax according to the domestic laws governing such tax. It may, therefore, differ from the amount of income subjected to tax by the State of source according to its domestic laws.(Replaced on 11 April 1977 see History)

40. Normally, the basis for the calculation of income tax is the total net income,i.e.gross income less allowable deductions. Therefore, it is the gross income derived from the State of source less any allowable deductions (specified or proportional) connected with such income which is to be exempted.(Replaced on 11 July 1977 see History)

41. Problems arise from the fact that most countries provide in their respective taxation laws for additional deductions from total income or specific items of income to arrive at the income subject to tax. A numerical example may illustrate the problem:a)

Domestic income (gross less allowable expenses)

100

b)

Income from the other State (gross less allowable expenses)

100

c)

Total income

200

d)

Deductions for other expenses provided for under the laws of the State of residence which are not connected with any of the income under a or b, such as insurance premiums, contributions to welfare institutions

-20

e)

“Net” income

180

f)

Personal and family allowances

-30

g)

Income subject to tax

150

The question is, what amount should be exempted from tax,e.g.

• 100 (line b), leaving a taxable amount of 50;

• 90 (half of line e, according to the ratio between line b and line c), leaving 60 (line f being fully deducted from domestic income);

• 75 (half of line g, according to the ratio between line b and line c), leaving 75;

• or any other amount.

(Replaced on 11 April 1977 see History)

42. A comparison of the laws and practices of the OECD member countries shows that the amount to be exempted varies considerably from country to country. The solution adopted by a State will depend on the policy followed by that State and its tax structure. It may be the intention of a State that its residents always enjoy the full benefit of their personal and family allowances and other deductions. In other States these tax free amounts are apportioned. In many States personal or family allowances form part of the progressive scale, are granted as a deduction from tax, or are even unknown, the family status being taken into account by separate tax scales.(Replaced on 11 April 1977 see History)

43. In view of the wide variety of fiscal policies and techniques in the different States regarding the determination of tax, especially deductions, allowances and similar benefits, it is preferable not to propose an express and uniform solution in the Convention, but to leave each State free to apply its own legislation and technique. Contracting States which prefer to have special problems solved in their convention are, of course, free to do so in bilateral negotiations. Finally, attention is drawn to the fact that the problem is also of importance for States applying the credit method (see paragraph 62below).(Replaced on 11 April 1977 see History)

Treatment of losses44. Several States in applying Article 23 A treat losses incurred in the other State in the same manner as they treat income arising in that State: as State of residence (State R), they do not allow deduction of a loss incurred from immovable property or a permanent establishment situated in the other State (E or S). Provided that this other State allows carry-over of such loss, the taxpayer will not be at any disadvantage as he is merely prevented from claiming a double deduction of the same loss namely in State E (or S) and in State R. Other States may, as State of residence R, allow a loss incurred in State E (or S) as a deduction from the income they assess. In such a case State R should be free to restrict the exemption under paragraph 1 of Article 23 A for profits or income which are made subsequently in the other State E (or S) by deducting from such subsequent profits or income the amount of earlier losses which the taxpayer can carry over in State E (or S). As the solution depends primarily on the domestic laws of the Contracting States and as the laws of the OECD member countries differ from each other substantially, no solution can be proposed in the Article itself, it being left to the Contracting States, if they find it necessary, to clarify the above-mentioned question and other problems connected with losses (see paragraph 62below for the credit method) bilaterally, either in the Article itself or by way of a mutual agreement procedure (paragraph 3 of Article 25).(Renumbered and amended on 11 April 1977 see History)

Taxation of the rest of the income45. Apart from the application of progressive tax rates which is now dealt with in paragraph 3 of the Article (see paragraphs 55 and 56 below), some problems may arise from specific provisions of the tax laws. Thus,e.g.some tax laws provide that taxation starts only if a minimum amount of taxable income is reached or exceeded (tax exempt threshold). Total income before application of the Convention may clearly exceed such tax free threshold, but by virtue of the exemption resulting from the application of the Convention which leads to a deduction of the tax exempt income from total taxable income, the remaining taxable income may be reduced to an amount below this threshold. For the reasons mentioned in paragraph 43 above, no uniform solution can be proposed. It may be noted, however, that the problem will not arise, if the alternative formulation of paragraph 1 of Article 23 A (as set out in paragraph 37 above) is adopted.(Replaced on 11 April 1977 see History)

46. Certain States have introduced special systems for taxing corporate income (see paragraphs 40 to 67 of the Commentary on Article 10). In States applying a split rate corporation tax (paragraph 43 of the said Commentary), the problem may arise whether the income to be exempted has to be deducted from undistributed income (to which the normal rate of tax applies) or from distributed income (to which the reduced rate applies) or whether the income to be exempted has to be attributed partly to distributed and partly to undistributed income. Where, under the laws of a State applying the split rate corporation tax, a supplementary tax is levied in the hands of a parent company on dividends which it received from a domestic subsidiary company but which it does not redistribute (on the grounds that such supplementary tax is a compensation for the benefit of a lower tax rate granted to the subsidiary on the distributions), the problem arises, whether such supplementary tax may be charged where the subsidiary pays its dividends out of income exempt from tax by virtue of the Convention. Finally a similar problem may arise in connection with taxes (précompte, Advance Corporation Tax) which are levied on distributed profits of a corporation in order to cover the tax credit attributable to the shareholders (see paragraph 47 of the Commentary on Article 10). The question is whether such special taxes connected with the distribution of profits, could be levied insofar as distributions are made out of profits exempt from tax. It is left to Contracting States to settle these questions by bilateral negotiations.(Amended on 23 July 1992 see History)

Paragraph 247. In Articles 10 and 11 the right to tax dividends and interest is divided between the State of residence and the State of source. In these cases, the State of residence is left free not to tax if it wants to do so (seee.g.paragraphs 72 to 78 below) and to apply the exemption method also to the above-mentioned items of income. However, where the State of residence prefers to make use of its right to tax such items of income, it cannot apply the exemption method to eliminate the double taxation since it would thus give up fully its right to tax the income concerned. For the State of residence, the application of the credit method would normally seem to give a satisfactory solution. Moreover, as already indicated in paragraph 31 above, States which in general apply the exemption method may wish to apply to specific items of income the credit method rather than exemption. Consequently, the paragraph is drafted in accordance with the ordinary credit method. The Commentary on Article 23 B hereafter appliesmutatis mutandisto paragraph 2 of Article 23 A.(Amended on 23 July 1992 see History)

48. In the cases referred to in the previous paragraph, certain maximum percentages are laid down for tax reserved to the State of source. In such cases, the rate of tax in the State of residence will very often be higher than the rate in the State of source. The limitation of the deduction which is laid down in the second sentence of paragraph 2 and which is in accordance with the ordinary credit method is therefore of consequence only in a limited number of cases. If, in such cases, the Contracting States prefer to waive the limitation and to apply the full credit method, they can do so by deleting the second sentence of paragraph 2.(Amended on 15 July 2014 see History)

Dividends from substantial holdings by a company49. The combined effect of paragraphs 1 and 2 of Article 10 and Article 23 (Article 23 A or 23 B as appropriate) is that the State of residence of the shareholder is allowed to tax dividends arising in the other State, but that it must credit against its own tax on such dividends the tax which has been collected by the State where the dividends arise at a rate fixed under paragraph 2 of Article 10. This regime equally applies when the recipient of the dividends is a parent company receiving dividends from a subsidiary; in this case, the tax withheld in the State of the subsidiary — and credited in the State of the parent company — is limited to 5 per cent of the gross amount of the dividends by the application of subparagraph a) of paragraph 2 of Article 10.(Replaced on 11 April 1977 see History)

50. These provisions effectively avoid the juridical double taxation of dividends but they do not prevent recurrent corporate taxation on the profits distributed to the parent company: first at the level of the subsidiary and again at the level of the parent company. Such recurrent taxation creates a very important obstacle to the development of international investment. Many States have recognised this and have inserted in their domestic laws provisions designed to avoid this obstacle. Moreover, provisions to this end are frequently inserted in double taxation conventions.(Replaced on 11 April 1977 see History)

51. The Committee on Fiscal Affairs has considered whether it would be appropriate to modify Article 23 of the Convention in order to settle this question. Although many States favoured the insertion of such a provision in the Model Convention this met with many difficulties, resulting from the diverse opinions of States and the variety of possible solutions. Some States, fearing tax evasion, preferred to maintain their freedom of action and to settle the question only in their domestic laws.(Replaced on 11 April 1977 see History)

52. In the end, it appeared preferable to leave States free to choose their own solution to the problem. For States preferring to solve the problem in their conventions, the solutions would most frequently follow one of the principles below:Exemption with progressionThe State of which the parent company is a resident exempts the dividends it receives from its subsidiary in the other State, but it may nevertheless take these dividends into account in computing the tax due by the parent company on the remaining income (such a provision will frequently be favoured by States applying the exemption method specified in Article 23 A).

Credit for underlying taxesAs regards dividends received from the subsidiary, the State of which the parent company is a resident gives credit as provided for in paragraph 2 of Article 23 A or in paragraph 1 of Article 23 B, as appropriate, not only for the tax on dividends as such, but also for the tax paid by the subsidiary on the profits distributed (such a provision will frequently be favoured by States applying as a general rule the credit method specified in Article 23 B).

Assimilation to a holding in a domestic subsidiaryThe dividends that the parent company derives from a foreign subsidiary are treated, in the State of the parent company, in the same way for tax purposes as dividends received from a subsidiary which is a resident of that State.

(Replaced on 11 April 1977 see History)

53. When the State of the parent company levies taxes on capital, a similar solution should also be applied to such taxes.(Added on 11 April 1977 see History)

54. Moreover, States are free to fix the limits and methods of application of these provisions (definition and minimum duration of holding of the shares, proportion of the dividends deemed to be taken up by administrative or financial expenses) or to make the relief granted under the special regime subject to the condition that the subsidiary is carrying out a genuine economic activity in the State of which it is a resident, or that it derives the major part of its income from that State or that it is subject to a substantial taxation on profits therein.(Added on 11 April 1977 see History)

Paragraph 355. The 1963 Draft Convention reserved expressly the application of the progressive scale of tax rates by the State of residence (last sentence of paragraph 1 of Article 23 A) and most conventions concluded between OECD member countries which adopt the exemption method follow this principle. According to paragraph 3 of Article 23 A, the State of residence retains the right to take the amount of exempted income or capital into consideration when determining the tax to be imposed on the rest of the income or capital. The rule applies even where the exempted income (or items of capital) and the taxable income (or items of capital) accrue to those persons (e.g.husband and wife) whose incomes (or items of capital) are taxed jointly according to the domestic laws. This principle of progression applies to income or capital exempted by virtue of paragraph 1 of Article 23 A as well as to income or capital which under any other provision of the Convention “shall be taxable only” in the other Contracting State (see paragraph 6 above). This is the reason why, in the 1977 Model Convention, the principle of progression was transferred from paragraph 1 of Article 23 A to a new paragraph 3 of the said Article, and reference was made to exemption “in accordance with any provision of the Convention”.(Amended on 23 July 1992 see History)

56. Paragraph 3 of Article 23 A relates only to the State of residence. The form of the Article does not prejudice the application by the State of source of the provisions of its domestic laws concerning the progression.(Added on 11 April 1977 see History)

Paragraph 456.1 The purpose of this paragraph is to avoid double non taxation as a result of disagreements between the State of residence and the State of source on the facts of a case or on the interpretation of the provisions of the Convention. The paragraph applies where, on the one hand, the State of source interprets the facts of a case or the provisions of the Convention in such a way that an item of income or capital falls under a provision of the Convention that eliminates its right to tax that item or limits the tax that it can impose while, on the other hand, the State of residence adopts a different interpretation of the facts or of the provisions of the Convention and thus considers that the item may be taxed in the State of source in accordance with the Convention, which, absent this paragraph, would lead to an obligation for the State of residence to give exemption under the provisions of paragraph 1.(Added on 29 April 2000 see History)

56.2 The paragraph only applies to the extent that the State of source has applied the provisions of the Convention to exempt an item of income or capital or has applied the provisions of paragraph 2 of Article 10 or 11 to an item of income. The paragraph would therefore not apply where the State of source considers that it may tax an item of income or capital in accordance with the provisions of the Convention but where no tax is actually payable on such income or capital under the provisions of the domestic laws of the State of source. In such a case, the State of residence must exempt that item of income under the provisions of paragraph 1 because the exemption in the State of source does not result from the application of the provisions of the Convention but, rather, from the domestic law of the State of source (see paragraph 34 above). Similarly, where the source and residence States disagree not only with respect to the qualification of the income but also with respect to the amount of such income, paragraph 4 applies only to that part of the income that the State of source exempts from tax through the application of the Convention or to which that State applies paragraph 2 of Article 10 or 11.(Added on 29 April 2000 see History)

56.3 Cases where the paragraph applies must be distinguished from cases where the qualification of an item of income under the domestic law of the State of source interacts with the provisions of the Convention to preclude that State from taxing an item of income or capital in circumstances where the qualification of that item under the domestic law of the State of residence would not have had the same result. In such a case, which is discussed in XREFSTYLE=ParaLabel Plural and 32.7 above, paragraph 1 does not impose an obligation on the State of residence to give exemption because the item of income may not be taxed in the State of source in accordance with the Convention. Since paragraph 1 does not apply, the provisions of paragraph 4are not required in such a case to ensure the taxation right of the State of residence.(Added on 29 April 2000 see History)

Commentary on the provisions of Article 23 B (credit method)Paragraph 1Methods57. Article 23 B, based on the credit principle, follows the ordinary credit method: the State of residence (R) allows, as a deduction from its own tax on the income or capital of its resident, an amount equal to the tax paid in the other State E (or S) on the income derived from, or capital owned in, that other State E (or S), but the deduction is restricted to the appropriate proportion of its own tax.(Renumbered and amended on 11 April 1977 see History)

58. The ordinary credit method is intended to apply also for a State which follows the exemption method but has to give credit, under paragraph 2 of Article 23 A, for the tax levied at limited rates in the other State on dividends and interest (see paragraph 47 above). The possibility of some modification as mentioned in paragraphs 47 and 48 above (full credit) could, of course, also be of relevance in the case of dividends and interest paid to a resident of a State which adopted the ordinary credit method (see also paragraph 63 below).(Renumbered and amended on 11 April 1977 see History)

59. The obligation imposed by Article 23 B on a State R to give credit for the tax levied in the other State E (or S) on an item of income or capital depends on whether this item may be taxed by the State E (or S) in accordance with the Convention. Paragraphs 32.1 to 32.7 above discuss how this condition should be interpreted. Items of income or capital which according to Article 8, to paragraph 3 of Article 13, to subparagraph a) of paragraphs 1 and 2 of Article 19 and to paragraph 3 of Article 22, “shall be taxable only” in the other State, are from the outset exempt from tax in State R (see paragraph 6 above), and the Commentary on Article 23 A applies to such exempted income and capital. As regards progression, reference is made to paragraph 2 of the Article (and paragraph 79below).(Amended on 29 April 2000 see History)

60. Article 23 B sets out the main rules of the credit method, but does not give detailed rules on the computation and operation of the credit. This is consistent with the general pattern of the Convention. Experience has shown that many problems may arise. Some of them are dealt with in the following paragraphs. In many States, detailed rules on credit for foreign tax already exist in their domestic laws. A number of conventions, therefore, contain a reference to the domestic laws of the Contracting States and further provide that such domestic rules shall not affect the principle laid down in Article 23 B. Where the credit method is not used in the domestic laws of a Contracting State, this State should establish rules for the application of Article 23 B, if necessary after consultation with the competent authority of the other Contracting State (paragraph 3 of Article 25).(Added on 11 April 1977 see History)

61. The amount of foreign tax for which a credit has to be allowed is the tax effectively paid in accordance with the Convention in the other Contracting State. Problems may arise,e.g.where such tax is not calculated on the income of the year for which it is levied but on the income of a preceding year or on the average income of two of more preceding years. Other problems may arise in connection with different methods of determining the income or in connection with changes in the currency rates (devaluation or revaluation). However, such problems could hardly be solved by an express provision in the Convention.(Added on 11 April 1977 see History)

62. According to the provisions of the second sentence of paragraph 1of Article 23 B, the deduction which the State of residence (R) is to allow is restricted to that part of the income tax which is appropriate to the income derived from the State S, or E (so-called “maximum deduction”). Such maximum deduction may be computed either by apportioning the total tax on total income according to the ratio between the income for which credit is to be given and the total income, or by applying the tax rate for total income to the income for which credit is to be given. In fact, in cases where the tax in State E (or S) equals or exceeds the appropriate tax of State R, the credit method will have the same effect as the exemption method with progression. Also under the credit method, similar problems as regards the amount of income, tax rate, etc. may arise as are mentioned in the Commentary on Article 23 A (see especially paragraphs 39 to 41 and 44 above). For the same reasons mentioned in paragraphs 42 and 43 above, it is preferable also for the credit method not to propose an express and uniform solution in the Convention, but to leave each State free to apply its own legislation and technique. This is also true for some further problems which are dealt with below.(Added on 11 April 1977 see History)

63. The maximum deduction is normally computed as the tax on net income,i.e.on the income from State E (or S) less allowable deductions (specified or proportional) connected with such income (see paragraph 40 above). For such reason, the maximum deduction in many cases may be lower than the tax effectively paid in State E (or S). This may especially be true in the case where, for instance, a resident of State R deriving interest from State S has borrowed funds from a third person to finance the interest-producing loan. As the interest due on such borrowed money may be offset against the interest derived from State S, the amount of net income subject to tax in State R may be very small, or there may even be no net income at all. As explained in paragraph 7.1 of the Commentary on Article 11, the problem, in that case, cannot be solved by State R, since little or no tax will be levied in that State. One solution would be to exempt such interest from tax in State S, as is proposed in paragraphs 7 to 7.12 of the Commentary on Article 11.(Amended on 15 July 2014 see History)

64. If a resident of State R derives income of different kinds from State S, and the latter State, according to its tax laws imposes tax only on one of these items, the maximum deduction which State R is to allow will normally be that part of its tax which is appropriate only to that item of income which is taxed in State S. However, other solutions are possible, especially in view of the following broader problem: the fact that credit has to be given,e.g.for several items of income on which tax at different rates is levied in State S, or for income from several States, with or without conventions, raises the question whether the maximum deduction or the credit has to be calculated separately for each item of income, or for each country, or for all foreign income qualifying for credit under domestic laws and under conventions. Under an “overall credit” system, all foreign income is aggregated, and the total of foreign taxes is credited against the domestic tax appropriate to the total foreign income.(Added on 11 April 1977 see History)

65. Further problems may arise in case of losses. A resident of State R, deriving income from State E (or S), may have a loss in State R, or in State E (or S) or in a third State. For purposes of the tax credit, in general, a loss in a given State will be set off against other income from the same State. Whether a loss suffered outside State R (e.g.in a permanent establishment) may be deducted from other income, whether derived from State R or not depends on the domestic laws of State R. Here similar problems may arise, as mentioned in the Commentary on Article 23 A (paragraph 44 above). When the total income is derived from abroad, and no income but a loss not exceeding the income from abroad arises in State R, then the total tax charged in State R will be appropriate to the income from State S, and the maximum deduction which State R is to allow will consequently be the tax charged in State R. Other solutions are possible.(Added on 11 April 1977 see History)

66. The aforementioned problems depend very much on domestic laws and practice, and the solution must, therefore, be left to each State. In this context, it may be noted that some States are very liberal in applying the credit method. Some States are also considering or have already adopted the possibility of carrying over unused tax credits. Contracting States are, of course, free in bilateral negotiations to amend the Article to deal with any of the aforementioned problems.(Added on 11 April 1977 see History)

67. In so-called “thin capitalisation” situations, the Model Convention allows the State of the borrower company, under certain conditions, to treat an interest payment as a distribution of dividends in accordance with its domestic legislation; the essential condition is that the contributor of the loan should effectively share the risks run by the borrower company. This gives rise to two consequences:

• the taxing at source of such “interest” at the rate for dividends (paragraph 2 of Article 10);

• the inclusion of such “interest” in the taxable profits of the lender company.

(Replaced on 23 July 1992 see History)

68. If the relevant conditions are met, the State of residence of the lender would be obliged to give relief for any juridical or economic double taxation of the interest as if the payment was in fact a dividend. It should then give credit for tax effectively withheld on this interest in the State of residence of the borrower at the rate applicable to dividends and, in addition, if the lender is the parent company of the borrower company, apply to such “interest” any additional relief under its parent/subsidiary regime. This obligation may result:from the actual wording of Article 23 of the Convention, when it grants relief in respect of income defined as dividends in Article 10 or of items of income dealt with in Article 10;

from the context of the Convention,i.e.from a combination of Articles 9, 10, 11, andXREFSTYLE=ArticleLabel23 only 23 and if need be, by way of the mutual agreement procedure:

• where the interest has been treated in the country of residence of the borrower company as a dividend under rules which are in accordance with paragraph 1 of Article 9 or paragraph 6 of Article 11 and where the State of residence of the lender agrees that it has been properly so treated and is prepared to apply a corresponding adjustment;

• when the State of residence of the lender applies similar thin capitalisation rules and would treat the payment as a dividend in a reciprocal situation,i.e.if the payment were made by a company established in its territory to a resident in the other Contracting State;

• in all other cases where the State of residence of the lender recognises that it was proper for the State of residence of the borrower to treat the interest as a dividend.

(Replaced on 23 July 1992 see History)

69. As regards dividends from a substantial holding by a company, reference is made to XREFSTYLE=ParaLabel Plural to 54above.(Renumbered on 23 July 1992 see History)

69.1 Problems may arise where Contracting States treat entities such as partnerships in a different way. Assume, for example, that the State of source treats a partnership as a company and the State of residence of a partner treats it as fiscally transparent. The State of source may, subject to the applicable provisions of the Convention, tax the partnership on its income when that income is realised and, subject to the limitations of paragraph 2 of Article 10, may also tax the distribution of profits by the partnership to its non-resident partners. The State of residence, however, will only tax the partner on his share of the partnership’s income when that income is realised by the partnership.(Added on 29 April 2000 see History)

69.2 The first issue that arises in this case is whether the State of residence, which taxes the partner on his share in the partnership’s income, is obliged, under the Convention, to give credit for the tax that is levied in the State of source on the partnership, which that latter State treats as a separate taxable entity. The answer to that question must be affirmative. To the extent that the State of residence flows through the income of the partnership to the partner for the purpose of taxing him, it must adopt a coherent approach and flow through to the partner the tax paid by the partnership for the purposes of eliminating double taxation arising from its taxation of the partner. In other words, if the corporate status given to the partnership by the State of source is ignored by the State of residence for purposes of taxing the partner on his share of the income, it should likewise be ignored for purposes of the foreign tax credit.(Added on 29 April 2000 see History)

69.3 A second issue that arises in this case is the extent to which the State of residence must provide credit for the tax levied by the State of source on the distribution, which is not taxed in the State of residence. The answer to that question lies in that last fact. Since the distribution is not taxed in the State of residence, there is simply no tax in the State of residence against which to credit the tax levied by the State of source upon the distribution. A clear distinction must be made between the generation of profits and the distribution of those profits and the State of residence should not be expected to credit the tax levied by the State of source upon the distribution against its own tax levied upon generation (see the first sentence of paragraph 64 above).(Added on 29 April 2000 see History)

Remarks concerning capital tax70. As paragraph 1 is drafted, credit is to be allowed for income tax only against income tax and for capital tax only against capital tax. Consequently, credit for or against capital tax will be given only if there is a capital tax in both Contracting States.(Renumbered on 23 July 1992 see History)

71. In bilateral negotiations, two Contracting States may agree that a tax called a capital tax is of a nature closely related to income tax and may, therefore, wish to allow credit for it against income tax and vice versa. There are cases where, because one State does not impose a capital tax or because both States impose capital taxes only on domestic assets, no double taxation of capital will arise. In such cases it is, of course, understood that the reference to capital taxation may be deleted. Furthermore, States may find it desirable, regardless of the nature of the taxes under the convention, to allow credit for the total amount of tax in the State of source or situs against the total amount of tax in the State of residence. Where, however, a convention includes both real capital taxes and capital taxes which are in their nature income taxes, the States may wish to allow credit against income tax only for the latter capital taxes. In such cases, States are free to alter the proposed Article so as to achieve the desired effect.(Renumbered on 23 July 1992 see History)

Tax sparing72. Some States grant different kinds of tax incentives to foreign investors for the purpose of attracting foreign investment. When the State of residence of a foreign investor applies the credit method, the benefit of the incentive granted by a State of source may be reduced to the extent that the State of residence, when taxing income that has benefited from the incentive, will allow a deduction only for the tax actually paid in the State of source. Similarly, if the State of residence applies the exemption method but subject the application of that method to a certain level of taxation by the State of source, the granting of a tax reduction by the State of source may have the effect of denying the investor the application of the exemption method in his State of residence.(Replaced on 29 April 2000 see History)

73. To avoid any such effect in the State of residence, some States that have adopted tax incentive programmes wish to include provisions, usually referred to as “tax sparing” provisions, in their conventions. The purpose of these provisions is to allow non-residents to obtain a foreign tax credit for the taxes that have been “spared” under the incentive programme of the source State or to ensure that these taxes will be taken into account for the purposes of applying certain conditions that may be attached to exemption systems.(Replaced on 29 April 2000 see History)

74. Tax sparing provisions constitute a departure from the provisions of Articles 23 A and 23 B. Tax sparing provisions may take different forms, as for example:the State of residence will allow as a deduction the amount of tax which the State of source could have imposed in accordance with its general legislation or such amount as limited by the Convention (e.g.limitations of rates provided for dividends and interest in Articles 10 and 11) even if the State of source has waived all or part of that tax under special provisions for the promotion of its economic development;

as a counterpart for the tax reduction by the State of source, the State of residence agrees to allow a deduction against its own tax of an amount (in part fictitious) fixed at a higher rate;

the State of residence exempts the income which has benefited from tax incentives in the State of source.

(Replaced on 29 April 2000 see History)

75. A 1998 report by the Committee of Fiscal Affairs, entitled “Tax Sparing: a Reconsideration”,[^73] analyses the tax policy considerations that underlie tax sparing provisions as well as their drafting. The report identifies a number of concerns that put into question the overall usefulness of the granting of tax sparing relief. These concerns relate in particular to:

• the potential for abuse offered by tax sparing;

• the effectiveness of tax sparing as an instrument of foreign aid to promote economic development of the source country; and

• general concerns with the way in which tax sparing may encourage States to use tax incentives.

(Replaced on 29 April 2000 see History)

76. Experience has shown that tax sparing is very vulnerable to taxpayer abuse, which can be very costly in terms of lost revenue to both the State of residence and the State of source. This kind of abuse is difficult to detect. In addition, even where it is detected, it is difficult for the State of residence to react quickly against such abuse. The process of removing or modifying existing tax sparing provisions to prevent such abuses is often slow and cumbersome.(Replaced on 29 April 2000 see History)

77. Furthermore, tax sparing is not necessarily an effective tool to promote economic development. A reduction or elimination of the benefit of the tax incentive by the State of residence will, in most cases, only occur to the extent that profits are repatriated. By promoting the repatriation of profits, tax sparing may therefore provide an inherent incentive to foreign investors to engage in short-term investment projects and a disincentive to operate in the source State on a long-term basis. Also, foreign tax credit systems are usually designed in a way that allows a foreign investor, in computing its foreign tax credit, to offset to some extent the reduction of taxes resulting from a particular tax incentive with the higher taxes paid in that or other country so that, ultimately, no additional taxes are levied by the State of residence as a result of the tax incentive.(Replaced on 29 April 2000 see History)

78. Finally, the accelerating integration of national economies has made many segments of the national tax bases increasingly geographically mobile. These developments have induced some States to adopt tax regimes that have as their primary purpose the erosion of the tax bases of other countries. These types of tax incentives are specifically tailored to target highly mobile financial and other services that are particularly sensitive to tax differentials. The potentially harmful effects of such regimes may be aggravated by the existence of ill-designed tax sparing provisions in treaties. This is particularly so where a State adopts a tax regime subsequent to the conclusion of treaties and tailors this regime so as to ensure that it is covered by the scope of the existing tax sparing provision.(Replaced on 29 April 2000 see History)

78.1 The Committee concluded that member States should not necessarily refrain from adopting tax sparing provisions. The Committee expressed the view, however, that tax sparing should be considered only in regard to States the economic level of which is considerably below that of OECD member States. Member States should employ objective economic criteria to define States eligible for tax sparing. Where States agree to insert a tax sparing provision, they are therefore encouraged to follow the guidance set out in section VI of the tax sparing report. The use of these “best practices” will minimise the potential for abuse of such provisions by ensuring that they apply exclusively to genuine investments aimed at developing the domestic infrastructure of the source State. A narrow provision applying to real investment would also discourage harmful tax competition for geographically mobile activities.(Added on 29 April 2000 see History)

Paragraph 279. This paragraph has been added to enable the State of residence to retain the right to take the amount of income or capital exempted in that State into consideration when determining the tax to be imposed on the rest of the income or capital. The right so retained extends to income or capital which “shall be taxable only” in the other State. The principle of progression is thus safeguarded for the State of residence, not only in relation to income or capital which “may be taxed” in the other State, but also for income or capital which “shall be taxable only” in that other State. The Commentary on paragraph 3 of Article 23 A in relation to the State of source also applies to paragraph 2 of Article 23 B.(Renumbered on 23 July 1992 see History)

Observations on the Commentary80. TheNetherlandsin principle is in favour of solving situations of both double taxation and double non-taxation due to conflicts of qualification between Contracting States, since in the Netherland’s view such situations are not intended by the Contracting States and moreover go against the object and purpose of a tax treaty. However, the Netherlands does not agree with the interpretation given in paragraphs 32.4 and 32.6 to the phrase “in accordance with the provisions of this Convention” in Articles 23 A and 23 B of the Convention that in cases of conflicts of qualification that are due to differences in domestic law between the State of source and the State of residence as a rule the qualification given by the State of source would prevail for purposes of the application by the State of residence of Article 23 A or 23 B. The Netherlands wishes to preserve its right to subject a solution and its modalities for a certain conflict of qualification to the circumstances of the cases at hand and to the relationship with the Contracting State concerned. The Netherlands therefore will adhere to said interpretation in paragraphs 32.4and 32.6 only, and to the extent which, it is explicitly so confirmed in a specific tax treaty, as a result of mutual agreement between competent authorities as meant in Article 25 of the Convention or as unilateral policy.(Added on 29 April 2000 see History)

81. Switzerlandreserves its right not to apply the rules laid down in paragraph 32.3 in cases where a conflict of qualification results from a modification to the internal law of the State of source subsequent to the conclusion of a Convention.(Amended on 15 July 2014 see History)

82. (Deleted on 17 July 2008 see History)

Title: Amended when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, the title read as follows:1 “COMMENTARY ON ARTICLES 23(A) AND 23(B) CONCERNING THE METHODS FOR AVOIDANCE OF DOUBLE TAXATION”

Paragraph 1Amended together with the chapter heading preceding it when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 1 and the preceding headings read as follows:“I. GENERAL OBSERVATION

A. THE SCOPE OF THE ARTICLES

1. The Articles deal with the so-called juridical double taxation, where the same income or capital is taxable in the hands of the same person by more than one State.”

Paragraph 2Amended when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 2 read as follows:“2. This case has to be distinguished especially from the so-called economic double taxation,i.e.a taxation of the same income or capital in the hands of two different persons both chargeable to tax. If two States wish so solve problems of economic double taxation, they must do so in bilateral negotiations.”

Paragraph 3Amended together with the footnote on 29 April 2000, by deleting the references therein to “fixed base”, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of the Annex of another report entitled “Issues Related to Article 14 of the OECD Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 27 January 2000). In the 1977 Model Convention and until 29 April 2000, paragraph 3 and its footnote read as follows:“3. International juridical double taxation may arise in three cases:where each Contracting State subjects the same person to tax on his worldwide income or capital (concurrent full liability to tax, cf. paragraph 4 below);

where a person is a resident of a Contracting State (R) and derives income from, or owns capital in, the other Contracting State (S or E) and both States impose tax on that income or capital (cf. paragraph 5 below);

where each Contracting State subjects the same person, not being a resident of either Contracting State to tax on income derived from, or capital owned in, a Contracting State; this may result, for instance, in the case where a non-resident person has a permanent establishment or fixed base in one Contracting State (E) through which he derives income from, or owns capital in, the other Contracting State (S) (concurrent limited tax liability, cf. paragraph 11 below).

[^74]

Paragraph 3 was previously amended when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 3 read as follows:“3. International juridical double taxation may arise in three cases:where each of two States under its domestic taxation law treats the same person as having his residence within its territory;

where each of two States imposes tax on the same income or capital (limited tax liability in both States),e.g.where a permanent establishment in one State derives income from immovable property in another State, and neither State is the State of residence of the owner of the permanent establishment;

where a person who has his residence in one State derives income from or owns capital in another State and both States impose tax on that income or capital.”

Paragraph 4Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 4 of the 1963 Draft Convention was deleted and a new paragraph 4 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 4 read as follows:“4. The Articles do not deal with the first two cases. The conflict in case (a) may be solved in accordance with Article 4 on fiscal domicile. The conflict in case (b) is outside the scope of the Conventions, as this is confined by Article 1 on the personal scope of the Convention, to persons who are residents of one or both of the Contracting States. It can, however be settled by applying the mutual agreement procedure.”

Paragraph 4.1Added on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005, on the basis of another report entitled “Cross-Border Income Tax Issues Arising From Employee Stock Option Plans” (adopted by the OECD Committee on Fiscal Affairs on 16 June 2004).

Paragraph 4.2Added on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005, on the basis of another report entitled “Cross-Border Income Tax Issues Arising From Employee Stock Option Plans” (adopted by the OECD Committee on Fiscal Affairs on 16 June 2004).

Paragraph 4.3Added on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005, on the basis of another report entitled “Cross-Border Income Tax Issues Arising From Employee Stock Option Plans” (adopted by the OECD Committee on Fiscal Affairs on 16 June 2004).

Paragraph 5Amended on 29 April 2000, by deleting the words “or the fixed base”, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of the Annex of another report entitled “Issues Related to Article 14 of the OECD Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 27 January 2000). In the 1977 Model Convention and until 29 April 2000, paragraph 5 read as follows:“5. The conflict in case b) may be solved by allocation of the right to tax between the Contracting States. Such allocation may be made by renunciation of the right to tax either by the State of source or situs (S) or of the situation of the permanent establishment or the fixed base (E), or by the State of residence (R), or by a sharing of the right to tax between the two States. The provisions of the Chapters III and IV of the Convention, combined with the provisions of Article 23 A or 23 B, govern such allocation.”

Paragraph 5 of the of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 5 of the 1963 Draft Convention was deleted and a new paragraph 5 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until it was deleted on the adoption of the 1977 Model Convention, paragraph 5 read as follows:“5. The conflict in case (c) may be solved by a renunciation either by the State of residence or by the State of source. In this connection it is to be noted that, in a number of special Articles of the Convention, the allocation of the right to tax has been given either to the State of residence or to the State of source.”

Paragraph 6Amended on 17 July 2008, to remove the reference to Article 14 in the footnote. After 28 January 2003 and until 17 July 2008, the first footnote of paragraph 6 read as follows:[^75]

The first footnote of paragraph 6 was previously amended on 28 January 2003, by replacing the words “and 4 of Article 13” with “and 5 of Article 13” in the first footnote to the paragraph, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 23 July 1992 and until 28 January 2003, the first footnote of paragraph 6 read as follows:[^76]

The first footnote of paragraph 6 was previously amended on 23 July 1992, by deleting the reference therein to paragraph 2 of Article 13, by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, the first footnote of paragraph 6 read as follows:[^77]

Paragraph 6 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 6 of the 1963 Draft Convention was deleted and a new paragraph 6 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 6 read as follows:“6. In the case where the State of source renounces its right to tax, the relevant Article states that the income and capital in question “shall be taxable only” in the other State. Accordingly, no question of double taxation arises here.”

Paragraph 7Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 7 of the 1963 Draft Convention was deleted and a new paragraph 7 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 7 read as follows:“7. In the case where the State of source does not renounce its right to tax,i.e.where the relevant Article states that the income or capital “may be taxed” in the State of source, the State of residence must give relief so as to avoid double taxation. Therefore, in the Articles submitted, the prior right of taxation in the State of source is implied, and the State of residence is left to provide the means by which double taxation is to be avoided.”

Paragraph 8Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 8 of the 1963 Draft Convention was amended and renumbered as paragraph 12 (see history of paragraph 12), the heading preceding paragraph 8 was amended and moved with it and a new paragraph 8 was added.

Paragraph 9Amended on 29 April 2000, by deleting the words “or a fixed base” and “or fixed base”, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of the Annex of another report entitled “Issues Related to Article 14 of the OECD Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 27 January 2000). In the 1977 Model Convention and until 29 April 2000, paragraph 9 read as follows:“9. Where a resident of the Contracting State R derives income from the same State R through a permanent establishment or a fixed base which he has in the other Contracting State E, State E may tax such income (except income from immovable property situated in State R) if it is attributable to the said permanent establishment or fixed base (paragraph 2 of Article 21). In this instance too, State R must give relief under Article 23 A or Article 23 B for income attributable to the permanent establishment or fixed base situated in State E, notwithstanding the fact that the income in question originally arises in State R (cf. paragraph 5 of the Commentary on Article 21). However, where the Contracting States agree to give to State R which applies the exemption method a limited right to tax as the State of source of dividends or interest within the limits fixed in paragraph 2 of the Articles 10 or 11 (cf. paragraph 5 of the Commentary on Article 21), then the two States should also agree upon a credit to be given by State E for the tax levied by State R, along the lines of paragraph 2 of Article 23 A or of paragraph 1 of Article 23 B.”

Paragraph 9 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 9 and the preceding heading were amended and a new paragraph 9 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 9 and the preceding heading read as follows:“1. The Exemption System

9. This system implies that the State to which the Convention has not given the right to tax a certain income shall leave out that income when determining the amount which is chargeable to income tax in that State.”

Paragraph 10Amended on 17 July 2008, by replacing the cross-reference to “paragraphs 49 to 54” of the Commentary on Article 24 with “paragraphs 67 to 72”, by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 28 January 2003 and until 17 July 2008, paragraph 10 read as follows:“10. Where a resident of State R derives income from a third State through a permanent establishment which he has in State E, such State E may tax such income (except income from immovable property situated in the third State) if it is attributable to such permanent establishment (paragraph 2 of Article 21). State R must give relief under Article 23 A or Article 23 B in respect of income attributable to the permanent establishment in State E. There is no provision in the Convention for relief to be given by Contracting State E for taxes levied in the third State where the income arises; however, under paragraph 3 of Article 24 any relief provided for in the domestic laws of State E (double taxation conventions excluded) for residents of State E is also to be granted to a permanent establishment in State E of an enterprise of State R (cf. paragraphs 49 to 54 of the Commentary on Article 24).”

Paragraph 10 was previously amended on 28 January 2003, by replacing the cross-reference “paragraph 4 of Article 24” with “paragraph 3 of Article 24”. This amendment related to the implementation of the redesignation of paragraph 2 of Article 24 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. After 29 April 2000 and until 28 January 2003, paragraph 10 read as follows:“10. Where a resident of State R derives income from a third State through a permanent establishment which he has in State E, such State E may tax such income (except income from immovable property situated in the third State) if it is attributable to such permanent establishment (paragraph 2 of Article 21). State R must give relief under Article 23 A or Article 23 B in respect of income attributable to the permanent establishment in State E. There is no provision in the Convention for relief to be given by Contracting State E for taxes levied in the third State where the income arises; however, under paragraph 4 of Article 24 any relief provided for in the domestic laws of State E (double taxation conventions excluded) for residents of State E is also to be granted to a permanent establishment in State E of an enterprise of State R (cf. paragraphs 49 to 54 of the Commentary on Article 24).”

Paragraph 10 was previously amended on 29 April 2000, by deleting the words “or a fixed base” and “or fixed base”, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of the Annex of another report entitled “Issues Related to Article 14 of the OECD Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 29 April 2000). After 23 July 1992 and until 29 April 2000, paragraph 10 read as follows:“10. Where a resident of State R derives income from a third State through a permanent establishment or a fixed base which he has in State E, such State E may tax such income (except income from immovable property situated in the third State) if it is attributable to such permanent establishment or fixed base (paragraph 2 of Article 21). State R must give relief under Article 23 A or Article 23 B in respect of income attributable to the permanent establishment or fixed base in State E. There is no provision in the Convention for relief to be given by Contracting State E for taxes levied in the third State where the income arises; however, under paragraph 4 of Article 24 any relief provided for in the domestic laws of State E (double taxation conventions excluded) for residents of State E is also to be granted to a permanent establishment in State E of an enterprise of State R (cf. paragraphs 49 to 54 of the Commentary on Article 24).”

Paragraph 10 was previously amended on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of paragraph 60 of another report entitled “Triangular Cases” (adopted by the OECD Council on 23 July 1992). In the 1977 Model Convention and until 23 July 1992, paragraph 10 read as follows:“10. Where a resident of State R derives income from a third State through a permanent establishment or a fixed base which he has in State E, such State E may tax such income (except income from immovable property situated in the third State) if it is attributable to such permanent establishment or fixed base (paragraph 2 of Article 21). State R must give relief under Article 23 A or Article 23 B in respect of income attributable to the permanent establishment or fixed base in State E. There is no provision in the Convention for relief to be given by Contracting State E for taxes levied in the third State where the income arises; however, under paragraph 4 of Article 24 any relief provided for in the domestic laws of State E (double taxation conventions excluded) for residents of State E is also to be granted to a permanent establishment in State E of an enterprise of State R (cf. paragraphs 51 to 55 of the Commentary on Article 24). Cases in which more than two States are involved (triangular cases) raise many problems in regard to which not only the convention between the States R and E but also conventions between States R and/or E with State S may come into play. It could be argued that a provision in a convention between State R and State E obliging State E to give credit or exemption for income derived from a third State leads to a more favourable treatment of the permanent establishment than is granted by State E to its own residents, and that the effect of the combined application of domestic laws and of one or more conventions may even result in double or multiple relief. It is, therefore, left to Contracting States to settle the question bilaterally either generally in a convention to be concluded between them or by way of a mutual agreement procedure (Article 25).”

Paragraph 10 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 10 of the 1963 Draft Convention was amended and renumbered as paragraph 14 (see history of paragraph 14) and a new paragraph 10 was added.

Paragraph 11Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 11 of the 1963 Draft Convention was deleted and a new paragraph 11 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 11 read as follows:“11. Where the exemption system is adopted in Conventions, and the State of residence is not given the right to tax, it normally follows the form described under (b).”

Paragraph 12Corresponds to paragraph 8 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 12 of the 1963 Draft Convention was amended and renumbered as paragraph 15 (see history of paragraph 15) and the preceding heading was amended and moved with it when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 8 of the 1963 Draft Convention was amended and renumbered as paragraph 12 of the 1977 Model Convention and the preceding heading was amended and moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 8 and the preceding heading read as follows:“B. Description of Methods for Avoidance of Double Taxation

8. A study of Convention concluded between O.E.C.D. Member countries shows that two leading principles are followed for the avoidance of double taxation. For purposes of simplicity only income tax is referred to in what follows, but the principles apply similarly to capital tax.”

Paragraph 13Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 13 of the 1963 Draft Convention was amended and renumbered as paragraph 16 (see history of paragraph 16) and a new paragraph 13 was added.

Paragraph 14Corresponds to paragraph 10 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 14 of the 1963 Draft Convention was amended and renumbered as paragraph 17 (see history of paragraph 17) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 10 of the 1963 Draft Convention was amended and renumbered as paragraph 14 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 10 read as follows:“10. The exemption system is found in two different forms:The income in question may be left out altogether, so that the State concerned is not entitled to take that income into consideration when determining the rate of tax to be imposed on the rest of the income. Hereinafter this method is referred to as “full exemption”.

The income in question is left out, but the State concerned retains the right to take that income into consideration when determining the rate of tax to be imposed on the rest of the income. Hereinafter this method is referred to as “exemption with progression”.”

Paragraph 15Corresponds to paragraph 12 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 15 of the 1963 Draft Convention was amended and renumbered as paragraph 18 (see history of paragraph 18) and the preceding heading was amended and moved with it when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 12 of the 1963 Draft Convention was amended and renumbered as paragraph 15 of the 1977 Model Convention and the preceding heading was amended and moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 12 and the preceding heading read as follows:“2. The credit system

12. The adoption of this system implies that the State applying it imposes tax on the basis of the taxpayer's total income including the income from another State, and then allows a deduction from its own tax for tax paid in that other State.”

Paragraph 16Corresponds to paragraph 13 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 16 of the 1963 Draft Convention was amended and renumbered as paragraph 19 (see history of paragraph 19) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 13 of the 1963 Draft Convention was amended and renumbered as paragraph 16 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 13 read as follows:“13. The credit system is found in different forms:The deduction given by the State of residence may be restricted so that the deduction does not exceed that part of its own tax appropriate to the income from the other State. Hereinafter this method is referred to as “ordinary credit”.

In some forms of the credit system the State of residence allows a deduction of the total amount of tax paid in the State of source. Hereinafter this method is referred to as “full credit”.

Further variations of the credit system are possible,e.g.where the State of residence limits the deduction to an amount not exceeding the tax which it would itself have imposed on that income if the taxpayer had no other income.”

Paragraph 17Corresponds to paragraph 14 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 17 of the 1963 Draft Convention was amended and incorporated into paragraphs 20 and 23 (see history of paragraph 20) and Table I that followed paragraph 17 was amended and moved immediately after paragraph 23 (see History of paragraph 23) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 14 of the 1963 Draft Convention was amended and renumbered as paragraph 17 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 14 read as follows:“14. Fundamentally the difference between the exemption system and the credit system is that the exemption system looks at income, the credit system at tax on income.”

Paragraph 18Corresponds to paragraph 15 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 18 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 15 of the 1963 Draft Convention was amended and renumbered as paragraph 18 and the preceding heading was amended and moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 15 and the preceding heading read as follows:“C. The Functions and Effects of the Methods

“15. An example in figures will facilitate the explanation of the effects of the various methods. Suppose the income to be 100,000, 80,000 being derived from one State (the State of residence) and 20,000 derived from the other State (the State of source). Assume that in the State of residence the rate of tax on an income of 100,000 is 35 per cent and that the rate of tax on an income of 80,000 is 30 per cent. Assume, too, that in the State of source the rate of tax is either: (i) 20 per cent or (ii) 40 per cent, so that the tax payable therein is (i) 20 per cent of 20,000 = 4,000 or (ii) 40 per cent of 20,000 = 8,000.”

Paragraph 18 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 18 read as follows:“18. Under the exemption system the State of residence limits its charge of taxation to that part of the total income which, in accordance with the various Articles in a Convention, it has a right to tax. It will impose tax on that part of the income either at the rate of tax applicable to that amount of income (full exemption) or at the rate of tax applicable to the total income wherever it arises (exemption with progression). In either event, the level of the tax in the State of source would have no influence on the amount of tax given up by the State of residence.”

Paragraph 19Corresponds to paragraph 16 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 19 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 16 of the 1963 Draft Convention was amended and renumbered as paragraph 19. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 16 read as follows:“16. If the taxpayer’s total income of 100,000 arises in the State of residence his tax would be 35,000, If he had an income of the same amount derived in the manner set out above, and, if there were no Convention between the State of residence and the State of source, the total amount of the tax would be, in case (i), 35,000 + 4,000 = 39,000 and, in case (ii), 35,000 + 8,000 = 43,000.”

Paragraph 19 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 19 read as follows:“19. Under the exemption system if the rate of tax in the State of source were the lower, the taxpayer would fare better than a taxpayer with the same total income arising solely in the State of residence. In the examples given, the tax in the case of full exemption would be 28,000 and, in the case of exemption with progression, 32,000, as compared with 35,000 if the total income arose solely in the State of residence.”

Paragraph 20Corresponds to the first sentence and subparagraphs a) and b) of paragraph 17 of the 1963 Draft Convention. Paragraph 20 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 17 of the 1963 Draft Convention was amended and incorporated into paragraphs 20 and 23 and the table following paragraph 17 was amended and moved immediately after paragraph 23 (see History of paragraph 23). In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 17 read as follows:“17. If a Convention were concluded between the two States, based on one of the following methods, the respective results in figures would be:

a) **Full exemption:

The tax in the State of residence would be 30 per cent of 80,000 = 24,000. The total amount of tax payable would therefore be, in case (i), 24,000 + 4,000 = 28,000 and, in case (ii), 24,000 + 8,000 = 32,000.

b) **Exemption with progression:

The tax in the State of residence would be 35 per cent of 80,000 = 28,000. The total amount of tax payable would therefore be, in case (i), 28,000 + 4,000 = 32,000 and, in case (ii), 28,000 + 8,000 = 36,000.

c) **Ordinary credit:

The State of residence would compute tax on the total income at a rate of 35 per cent,i.e.35,000. The amount of tax in the State of residence corresponding to the income from the State of source would be 35 per cent of 20,000 = 7,000 (maximum credit). In case (i) the tax in the State of source would be 4,000 and the State of residence would allow a deduction of this amount since the question of restriction does not arise. The tax in the State of residence would therefore be 35,000 - 4,000 = 31,000. The total amount of tax would be 31,000 + 4,000 = 35,000. In case (ii) the tax in the State of source would be 8,000 and the State of residence would allow a deduction of 7,000 only, that is the amount of the maximum credit. The tax in the State of residence would therefore be 35,000 - 7,000 = 28,000. The total amount of tax would be 28,000 + 8,000 = 36,000.

d) **Full credit:

The State of residence would compute tax on the total income at a rate of 35 per cent,i.e.35,000. In case (i) the tax in the State of source would be 4,000 and the State of residence would allow a deduction of this amount. The tax in the State of residence would therefore be 35,000 - 4,000 = 31,000 and the total amount of tax would be 31,000 + 4,000 = 35,000. In case (ii) the tax in the State of source would be 8,000 and the State of residence would allow a deduction of this amount. The tax in the State of residence 8,000 = 35,000.”

Paragraph 20 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 20 read as follows:“20. If the rate of tax in the State of source were the higher, the result, in the case of exemption with progression, would be unfavourable for the taxpayer. In the examples given for case (ii) in paragraph 15, the figure would be 36,000, as compared with 35,000 if the total income arose in the State of residence. But in the Case of full exemption, the result, in the example given, would be in the taxpayer's favour,i.e.32,000, as compared with 35,000.”

Paragraph 21Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 21 of the 1963 Draft Convention was deleted and a new paragraph 21 was added when the 1977 Model Convention was adopted. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 21 read as follows:“21. Under these forms of exemption the State of residence would give up tax as follows:

a) Full exemption:

1 11,000 irrespective of whether the tax in the State of source is 4,000 or 8,000.

b) Exemption with progression:

1 7,000 irrespective of whether the tax in the State of source is 4,000 or 8,000.”

Paragraph 22Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 22 of the 1963 Draft Convention was amended and renumbered as paragraph 24 (see history of paragraph 24) and a new paragraph 22 was added.

Paragraph 23The tables following paragraph 23 were relocated immediately after paragraph 27 (see history of paragraph 27) on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 23 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 23 of the 1963 Draft Convention was amended and renumbered as paragraph 25 (see history of paragraph 25) and a new paragraph 23 was added. At the same time, Tables I and II that followed paragraphs 17 and 28 respectively were amended and moved immediately after paragraph 23. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, Tables I and II, which previously followed paragraphs 17 and 28 respectively read as follows:TABLE I. TOTAL AMOUNT OF TAX IN THE DIFFERENT CASES ILLUSTRATED ABOVEI. All income arising in the State of residence:

tax 35,000

II. Income arising in two States, viz. 80,000 in the State of residence and 20,000 in the State of source.

Tax in State of source 4,000 (case i)

Tax in State of source 8,000 (caseii)

No Convention

39,000

43,000

a) Full exemption

28,000

32,000

b) Exemption with progression

32,000

36,000

c) Ordinary credit

35,000

36,000

d) Full credit **

35,000

35,000

TABLE II. AMOUNT OF TAX GIVEN UP BY THE STATE OF RESIDENCETax in State of source 4,000 (casei>)

Tax in State of source 8,000 (caseii>)

No Convention

0

0

a) Full exemption

11,000

11,000

b) Exemption with progression

7,000

7,000

c) Ordinary credit

4,000

7,000

d) Full credit **

4,000

8,000

Paragraph 24Corresponds to paragraph 22 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 24 of the 1963 Draft Convention was amended and renumbered as paragraph 27 (see history of paragraph 27) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 22 of the 1963 Draft Convention was amended and renumbered as paragraph 24 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 22 read as follows:“22. Under the credit system the State of residence retains its right to tax the total income of the taxpayer, but against the tax so imposed it allows a certain deduction. A characteristic of the credit systems described above is that the State of residence is never obliged to allow a deduction greater than the tax paid in the State of source.”

Paragraph 25Corresponds to paragraph 23 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 25 of the 1963 Draft Convention was deleted and paragraph 23 of the 1963 Draft Convention was amended and renumbered as paragraph 25 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 23 read as follows:“23. Where the tax in the State of source is the lower, the taxpayer will always have to pay the same amount of tax as he would have had to pay if he were taxed solely in the State of residence. [In case (i) 35,000 — 4,000 + 4,000 = 35,000.]”

Paragraph 25 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 25 read as follows:“25. If the tax in the State of source were the higher, and the State of residence were to allow full credit, the taxpayer would have to pay the same amount of tax as if he were taxed solely in the State of residence. [In case (ii) 35,000 - 8,000 + 8,000 = 35,000.]”

Paragraph 26Corresponds to paragraph 28 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 26 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 28 of the 1963 Draft Convention was amended and renumbered as paragraph 26 and the preceding heading was moved immediately before paragraph 29. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 28 read as follows:“28. A system where the State of residence gives up the part of its own tax appropriate to the income from the State of source — irrespective of the tax paid in the State of source — produces the same result as an exemption system with progression.”

Paragraph 26 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 26 read as follows:“26. Under the various forms of the credit system described above, the State of residence never gives up an amount of its tax greater than the tax levied in the State of source. This underlines a fundamental distinction between the credit and the exemption systems.”

Paragraph 27The tables following paragraph 27 correspond to the tables that followed paragraph 23 as they read before 23 July 1992. The tables were relocated by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 27 corresponds to paragraph 24 of the 1963 Draft Convention. Paragraph 27 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 24 of the 1963 Draft Convention was amended and renumbered as paragraph 27. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 24 read as follows:“24. Where the tax in the State of source is the higher, and where the deduction is limited to the appropriate part of the tax imposed in the State of residence, the taxpayer will not get a deduction for the whole amount of the tax paid in the State of source. In such an event the result would be less favourable for the taxpayer than of his whole income arose in the State of residence. [In case (ii) 35,000 — 7,000 + 8,000 = 36,000.]”

Paragraph 27 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 27 read as follows:“27. In the above-mentioned examples the State of residence gives up the following amounts of tax:a)

Ordinary Credit :

Where the tax in the State of source is 4,000

4,000

Where the tax in the State of source is 8,000

7,000

b)

Full credit :

Where the tax in the State of source is 4,000

4,000

Where the tax in the State of source is 8,000

7,000

Paragraph 28Corresponds to paragraph 29 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 28 of the 1963 Draft Convention was amended and renumbered as paragraph 26 (see history of paragraph 26) and Table II, which followed paragraph 28, was amended and moved immediately after paragraph 23 (see history of paragraph 23) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 29 of the 1963 Draft Convention was amended and renumbered as paragraph 28 of the 1977 Model Convention and the preceding heading was moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 29 read as follows:“29. In the Conventions concluded between O.E.C.D. Member countries both systems have been adopted. Some States have a preference for one system, some have a preference for the other. Theoretically a single system could be held to be more desirable, but, on account of the preferences referred to, each State has been left free to make its own choice. On the other hand, it has been found important to limit inside each system the number of methods to be employed.”

Paragraph 29Corresponds in part to paragraph 29 of the 1963 Draft Convention. Paragraph 29 of the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963), was amended and incorporated into paragraphs 28 and 29 (see history of paragraph 28) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, the heading preceding paragraph 29 was moved immediately before paragraph 28.

Paragraph 30Amended when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 30 read as follows:“30. In view of this limitation, the Articles have been drafted so that Member countries are left free to choose between two methods: the exemption method with progression [Article 23(A)] and the ordinary credit method [Article 23(B)]. If two Contracting States both adopt the same method, it will be sufficient of the relevant Article is inserted in the Convention. On the other hand, if the two Contracting States adopt different methods, the name of the State must be inserted each in the appropriate Article, according to the method adopted by that State.”

Paragraph 31Amended on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008, on the basis of another report entitled “Tax Treaty Issues Relating to REITs” (adopted by the OECD Committee on Fiscal Affairs on 20 June 2008). In the 1977 Model Convention and until 17 July 2008, paragraph 31 read as follows:“31. Contracting States may use a combination of the two methods. Such combination is indeed necessary for a Contracting State R which generally adopts the exemption method in the case of income which under Articles 10 and 11 may be subjected to a limited tax in the other Contracting State S. For such case, Article 23 A provides in paragraph 2 a credit for the limited tax levied in the other Contracting State S. Moreover, States which in general adopt the exemption method may wish to exclude specific items of income from exemption and to apply to such items the credit method. In such case, paragraph 2 of Article 23 A could be amended to include these items of income.”

Paragraph 31 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 31 of the 1963 Draft Convention was deleted and a new paragraph 31 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 31 read as follows:“31. Perhaps it may be of interest to add that, in particular circumstances, both methods could be combined with advantage. Thus it will be noted from paragraph 39 that paragraph 2 of Article 23(A) -- the exemption Article -- is drafted in accordance with the credit method, and from paragraphs 47 to 51 that the adoption of the exemption method, in respect of the type of income referred to therein, would obviate difficulties that arise under the credit method.”

Paragraph 31.1Added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Restricting the Entitlement to Treaty Benefits” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 32Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 32 of the 1963 Draft Convention was amended and incorporated into paragraphs 33 and 34 (see history of paragraph 33) and a new paragraph 32 was added. At the same time, the headings preceding paragraph 32 were amended and moved immediately before paragraph 33.

Paragraph 32.1Paragraph 32.1 and the heading preceding it were added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 32.2Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 32.3Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 32.4Amended on 28 January 2003, by replacing the words “paragraph 4 of Article 13” in the sixth sentence, with “paragraph 5 of Article 13”, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 29 April 2000 and until 28 January 2003, paragraph 32.4 read as follows:“32.4 This point may be illustrated by the following example. A business is carried on through a permanent establishment in State E by a partnership established in that State. A partner, resident in State R, alienates his interest in that partnership. State E treats the partnership as fiscally transparent whereas State R treats it as taxable entity. State E therefore considers that the alienation of the interest in the partnership is, for the purposes of its Convention with State R, an alienation by the partner of the underlying assets of the business carried on by the partnership, which may be taxed by that State in accordance with paragraph 1 or 2 of Article 13. State R, as it treats the partnership as a taxable entity, considers that the alienation of the interest in the partnership is akin to the alienation of a share in a company, which could not be taxed by State E by reason of paragraph 4 of Article 13. In such a case, the conflict of qualification results exclusively from the different treatment of partnerships in the domestic laws of the two States and State E must be considered by State R to have taxed the gain from the alienation “in accordance with the provisions of the Convention” for purposes of the application of Article 23 A or Article 23 B. State R must therefore grant an exemption pursuant to Article 23 A or give a credit pursuant to Article 23 B irrespective of the fact that, under its own domestic law, it treats the alienation gain as income from the disposition of shares in a corporate entity and that, if State E's qualification of the income were consistent with that of State R, State R would not have to give relief under Article 23 A or Article 23 B. No double taxation will therefore arise in such a case.”

Paragraph 32.4 was added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 32.5Amended on 28 January 2003, by replacing the words “paragraph 4” in the second sentence, with “paragraph 5”, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 29 April 2000 and until 28 January 2003, paragraph 32.5 read as follows:“32.5 Article 23 A and Article 23 B, however, do not require that the State of residence eliminate double taxation in all cases where the State of source has imposed its tax by applying to an item of income a provision of the Convention that is different from that which the State of residence considers to be applicable. For instance, in the example above, if, for purposes of applying paragraph 2 of Article 13, State E considers that the partnership carried on business through a fixed place of business but State R considers that paragraph 4 applies because the partnership did not have a fixed place of business in State E, there is actually a dispute as to whether State E has taxed the income in accordance with the provisions of the Convention. The same may be said if State E, when applying paragraph 2 of Article 13, interprets the phrase “forming part of the business property” so as to include certain assets which would not fall within the meaning of that phrase according to the interpretation given to it by State R. Such conflicts resulting from different interpretation of facts or different interpretation of the provisions of the Convention must be distinguished from the conflicts of qualification described in the above paragraph where the divergence is based not on different interpretations of the provisions of the Convention but on different provisions of domestic law. In the former case, State R can argue that State E has not imposed its tax in accordance with the provisions of the Convention if it has applied its tax based on what State R considers to be a wrong interpretation of the facts or a wrong interpretation of the Convention. States should use the provisions of Article 25 (Mutual Agreement Procedure), and in particular paragraph 3 thereof, in order to resolve this type of conflict in cases that would otherwise result in unrelieved double taxation.”

Paragraph 32.5 was added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 32.6Amended on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 29 April 2000 and until 17 July 2008, paragraph 32.6 read as follows:“32.6 The phrase “in accordance with the provisions of this Convention, may be taxed” must also be interpreted in relation to possible cases of double non-taxation that can arise under Article 23 A. Where the State of source considers that the provisions of the Convention preclude it from taxing an item of income or capital which it would otherwise have taxed, the State of residence should, for purposes of applying paragraph 1 of Article 23 A, consider that the item of income may not be taxed by the State of source in accordance with the provisions of the Convention, even though the State of residence would have applied the Convention differently so as to tax that income if it had been in the position of the State of source. Thus the State of residence is not required by paragraph 1 to exempt the item of income, a result which is consistent with the basic function of Article 23 which is to eliminate double taxation.”

Paragraph 32.6 was added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 32.7Amended on 28 January 2003, by replacing the words “paragraph 4 of Article 13” in the fourth sentence, with “paragraph 5 of Article 13”, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 29 April 2000 and until 28 January 2003, paragraph 32.7 read as follows:“32.7 This situation may be illustrated by reference to a variation of the example described above. A business is carried on through a fixed place of business in State E by a partnership established in that State and a partner, resident in State R, alienates his interest in that partnership. Changing the facts of the example, however, it is now assumed that State E treats the partnership as a taxable entity whereas State R treats it as fiscally transparent; it is further assumed that State R is a State that applies the exemption method. State E, as it treats the partnership as a corporate entity, considers that the alienation of the interest in the partnership is akin to the alienation of a share in a company, which it cannot tax by reason of paragraph 4 of Article 13. State R, on the other hand, considers that the alienation of the interest in the partnership should have been taxable by State E as an alienation by the partner of the underlying assets of the business carried on by the partnership to which paragraphs 1 or 2 of Article 13 would have been applicable. In determining whether it has the obligation to exempt the income under paragraph 1 of Article 23 A, State R should nonetheless consider that, given the way that the provisions of the Convention apply in conjunction with the domestic law of State E, that State may not tax the income in accordance with the provisions of the Convention. State R is thus under no obligation to exempt the income.”

Paragraph 32.7 was added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 32.8Added together with the heading preceding it on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005, on the basis of another report entitled “Cross-Border Income Tax Issues Arising From Employee Stock Option Plans” (adopted by the OECD Committee on Fiscal Affairs on 16 June 2004).

Paragraph 33Corresponds to part of paragraph 32 of the 1963 Draft Convention. Paragraph 33 of the 1963 Draft Convention was amended and renumbered as paragraph 35 (see history of paragraph 35) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 32 of the 1963 Draft Convention was amended and incorporated into paragraphs 33 and 34 of the 1977 Model Convention and the preceding headings were amended and moved immediately before paragraph 33. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 32 and the preceding headings read as follows:“II. COMMENTS ON ARTICLE 23(A) (EXEMPTION)

1 Paragraph 1

A. The obligation of the state of residence to give exemption

32. In the Article it is laid down that the State of residence shall exempt from tax income and capital, which in accordance with the Convention “may be taxed” in the other State. The State of residence must accordingly give exemption whether or not the income or capital in question is actually taxed in the State of source. This is in accordance with most Conventions based on the exemption system between O.E.C.D. Member countries. It is regarded as the most practical method since it relieves the State of residence from undertaking onerous and time-consuming investigations of the actual taxation position in the State of source.”

Paragraph 34Amended on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999). In the 1977 Model Convention and until 29 April 2000, paragraph 34 read as follows:“34. The State of residence must accordingly give exemption whether or not the right to tax is in effect exercised by the other State. This method is regarded as the most practical one since it relieves the State of residence from undertaking investigations of the actual taxation position in the other State.”

Paragraph 34 of the 1977 Model Convention corresponded to part of paragraph 32 of the 1963 Draft Convention. Paragraph 34 and the preceding heading, as they read in the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963), were deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 32 of the 1963 Draft Convention was amended and incorporated into paragraphs 33 and 34 (see history of paragraph 33).

Paragraph 34 and the preceding heading as they read in the 1963 Draft Convention and until they were deleted on 11 April 1977 when the 1977 Model Convention was adopted, read as follows:“B. The reservation of the progression

34. In most of the Conventions concluded between O.E.C.D. Member countries on the basis of the exemption system the State of residence retains the right to take the amount of exempted income or capital into consideration when determining the rate of tax to be imposed on the rest of the income or capital. A similar provision therefore is inserted in the Article.”

Paragraph 34.1Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 35Amended on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999). After 23 July 1992 and until 29 April 2000, paragraph 35 read as follows:“35. Occasionally, negotiating States may find it reasonable in certain circumstances to make an exception to the absolute obligation on the State of residence to give exemption. Such may be the case, in order to avoid non-taxation, where under the domestic laws of the State of source no tax on specific items of income or capital is provided, or tax is not effectively collected owing to special circumstances such as the set-off of losses, a mistake, or the statutory time limit having expired. To avoid non-taxation of specific items of income, Contracting States may agree to amend the relevant Article itself (cf. paragraph 9 of the Commentary on Article 15 and paragraph 12 of the Commentary on Article 17; for the converse case where relief in the State of source is subject to actual taxation in the State of residence, cf. paragraph 20 of the Commentary on Article 10, paragraph 10 of the Commentary on Article 11, paragraph 6 of the Commentary on Article 12, paragraph 21 of the Commentary on Article 13 and paragraph 3 of the Commentary on Article 21). One might also make an exception to the general rule, in order to achieve a certain reciprocity, where one of the States adopts the exemption method and the other the credit method. Finally, another exception to the general rule may be made where a State wishes to apply to specific items of income the credit method rather than exemption (cf. paragraph 31 above).”

Paragraph 35 was previously amended on 23 July 1992, by replacing the references therein to paragraph 4 of the Commentary on Article 15 and to paragraph 5 of the Commentary on Article 17 with references to paragraphs 9 and 12 respectively, by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 35 read as follows:“35. Occasionally, negotiating States may find it reasonable in certain circumstances to make an exception to the absolute obligation on the State of residence to give exemption. Such may be the case, in order to avoid non-taxation, where under the domestic laws of the State of source no tax on specific items of income or capital is provided, or tax is not effectively collected owing to special circumstances such as the set-off of losses, a mistake, or the statutory time limit having expired. To avoid non-taxation of specific items of income, Contracting States may agree to amend the relevant Article itself (cf. paragraph 4 of the Commentary on Article 15 and paragraph 5 of the Commentary on Article 17; for the converse case where relief in the State of source is subject to actual taxation in the State of residence, cf. paragraph 20 of the Commentary on Article 10, paragraph 10 of the Commentary on Article 11, paragraph 6 of the Commentary on Article 12, paragraph 21 of the Commentary on Article 13 and paragraph 3 of the Commentary on Article 21). One might also make an exception to the general rule, in order to achieve a certain reciprocity, where one of the States adopts the exemption method and the other the credit method. Finally, another exception to the general rule may be made where a State wishes to apply to specific items of income the credit method rather than exemption (cf. paragraph 31 above).”

Paragraph 35 of the 1977 Model Convention corresponded to paragraph 33 of the 1963 Draft Convention. Paragraph 35 of the 1963 Draft Convention was deleted and paragraph 33 of the 1963 Draft Convention was amended and renumbered as paragraph 35 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 33 read as follows:“33. Exceptionally some negotiating States may find it reasonable in certain circumstances to deviate from the provision concerning the absolute obligation of the State of residence to give exemption. Such may be the case where one of the States adopts the credit method and the other State the exemption method. It may also be the case that the internal legislation of the State of source does not enable the fiscal authorities of that State to make use of a right to tax conferred on it by the Convention —e.g.where it does not impose capital tax. In such cases it is left to the negotiating States to agree upon the necessary modifications in the provision mentioned.”

Paragraph 35 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 35 read as follows:“35. The provision concerning progression, proposed in the Article, relates only to the State of residence. A question arises, however, when a State of source which applies a progressive tax scale gives up the right to tax and the non-resident taxpayer derives other income from that State. Different principles may be applied by a State of source in determining its progression. Its internal tax law may provide for the calculation of the progression on the global income of the taxpayer or only on the total income arising to the taxpayer in the State of source.”

Paragraph 36Deleted on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999). In the 1977 Model Convention and until 29 April 2000, paragraph 36 read as follows:“36. As already mentioned in paragraph 31 above, the exemption method does not apply to such items of income which according to the Convention may be taxed in the State of residence but may also be subjected to a limited tax in the other Contracting State. For such items of income, paragraph 2 of Article 23 A provides for the credit method (cf. paragraph 47 below).”

Paragraph 36 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 36 of the 1963 Draft Convention was deleted and a new paragraph 36 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 36 read as follows:“36. The form of the Article does not prejudice the application by the State of source of the provisions of its national legislation concerning the progression. If two Contracting States wish to clarify whether, or to what extent, the State of source shall have the right to use a progression they are left free to do so in bilateral negotiations.”

Paragraph 37Amended and the preceding heading was renumbered as “B”, when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 37 and the preceding heading read as follows:“C. Alternative Formulation of the Article

37. An effect of the exemption system as it is drafted in the Article is that the taxable income or capital in the State of residence is reduced by the amount which the State of residence exempts. If in a particular State the amount of income as determined for income tax purposes is used as a measure for other purposes, e.g. social benefits, the application of the exemption system in the form proposed may have the effect that such benefits may be given to persons who ought not to receive them. To avoid such consequences, the Article may be altered so that the income in question is included in the taxable income in the State of residence. The State of residence must then in such cases give up that part of the total tax appropriate to the income concerned. This procedure would give the same result as the Article in the form proposed. States can be left free to make such modifications in the drafting of the Article. If a State wants to draft the Article as indicated above, paragraph 1 may be drafted as follows:“Where a resident of a Contracting State derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall, subject to the provisions of paragraph 2, allow as a deduction from the income tax or capital tax that part of the income tax or capital tax, respectively, which is appropriate, as the case may be, to the income derived from or the capital owned in that other Contracting State.”

Paragraph 38Amended on 22 July 2010 by the report entitled “The 2010 Update to the Model Tax Convention”, adopted by the OECD Council on 22 July 2010. In the 1977 Model Convention and until 22 July 2010, paragraph 38 read as follows:“38. Article 23 A contains the principle that the State of residence has to give exemption, but does not give detailed rules on how the exemption has to be implemented. This is consistent with the general pattern of the Convention. Articles 6 to 22 too lay down rules attributing the right to tax in respect of the various types of income or capital without dealing, as a rule, with the determination of taxable income or capital, deductions, rate of tax, etc. (cf., however, paragraph 3 of Article 7 and Article 24). Experience has shown that many problems may arise. This is especially true with respect to Article 23 A. Some of them are dealt with in the following paragraphs. In the absence of a specific provision in the Convention, the domestic laws of each Contracting State are applicable. Some conventions contain an express reference to the domestic laws but of course this would not help where the exemption method is not used in the domestic laws. In such cases, Contracting States which face this problem should establish rules for the application of Article 23 A, if necessary, after having consulted with the competent authority of the other Contracting State (paragraph 3 of Article 25).”

Paragraph 38 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 38 of the 1963 Draft Convention was amended and renumbered as paragraph 44 (see history of paragraph 44) and the preceding heading was amended and moved with it. At the same time, a new paragraph 38 and the preceding heading were added.

Paragraph 39Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 39 of the 1963 Draft Convention was amended and renumbered as paragraph 47 (see history of paragraph 47) and the preceding heading was amended and moved with it. At the same time, a new paragraph 39 and the preceding heading were added.

Paragraph 40Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 40 of the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963), was amended and renumbered as paragraph 48 (see history of paragraph 48) and a new paragraph 40 was added.

Paragraph 41Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 41 of the 1963 Draft Convention was amended and renumbered as paragraph 57 (see history of paragraph 57), the preceding headings were amended and moved with it and a new paragraph 41 was added.

Paragraph 42Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time paragraph 42 of the 1963 Draft Convention was amended and renumbered as paragraph 58 (see history of paragraph 58) and a new paragraph 42 was added.

Paragraph 43Replaced paragraph 43 of the 1963 Draft Convention when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 43 of the 1963 Draft Convention was deleted and a new paragraph 43 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 43 read as follows:“43. According to the Article the deduction, which the State of residence is to allow, shall not exceed that part of the income tax which is appropriate to the income derived from the State of source. If a resident of one State derives income of different kinds from the State of source and that State, according to its tax law, imposes tax only on one of these incomes, the maximum deduction which the State of residence is to allow will be that part of its tax which is appropriate only to that item of income which is taxed in the State of source. If a resident of one State, deriving income from another State, has a loss in his State of residence — less than the income from abroad — the total tax charged in the State of residence will be appropriate to the income from the State of source, and the maximum deduction which the State of residence is to allow will consequently be the tax charged in that State.”

Paragraph 44Corresponds to 38 of the 1963 Draft Convention. Paragraph 44 of the 1963 Draft Convention was deleted and paragraph 38 was amended and renumbered when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, the heading preceding paragraph 38 was amended and moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 38 and the preceding heading read as follows:“D. Special Treatment of Losses

38. Where the State of residence allows as a deduction from the income it assesses the amount of a loss incurred in the other State, there should be no objection if, when profits are made subsequently in the other State, the exemption for the later years is restricted appropriately. States are left free in this respect and, if it is found necessary for clarification, can refer to such a restriction in the Article.”

Paragraph 44 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 44 read as follows:“44. A modification of the credit method was requested by Italy. The Italian taxation system is based predominantly on the principle of the territoriality of the tax, that is to say, in principle, any income arising abroad is not taxable in Italy for the purposes of the impersonal or schedular taxes (i.e. tax on income from movable property, tax on income from built-up property, tax on income from land, etc.) but, when taxable, is charged to the progressive complementary tax or to the company tax. In view of that fact, Italy wishes to limit the credit to that part only of the tax paid abroad which exceeds the Italian impersonal or schedular tax not charged in Italy. It is agreed that Italy can be left free to apply the credit method with such modification.”

Paragraph 45Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 45 of the 1963 Draft Convention was amended and renumbered as paragraph 68 (see history of paragraph 70) and the preceding heading was amended and moved with it. At the same time, a new paragraph 45 and preceding heading were added.

Paragraph 46Amended on 23 July 1992, by replacing the references therein to paragraphs 36 to 65, 39 and 43 of the Commentary on Article 10 with references to paragraphs 40 to 67, 43 and 47 respectively, by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 46 read as follows:“46. Certain States have introduced special systems for taxing corporate income (cf. paragraphs 36 to 65 of the Commentary on Article 10). In States applying a split rate corporation tax (paragraph 39 of the said Commentary), the problem may arise whether the income to be exempted has to be deducted from undistributed income (to which the normal rate of tax applies) or from distributed income (to which the reduced rate applies) or whether the income to be exempted has to be attributed partly to distributed and partly to undistributed income. Where, under the laws of a State applying the split rate corporation tax, a supplementary tax is levied in the hands of a parent company on dividends which it received from a domestic subsidiary company but which it does not redistribute (on the grounds that such supplementary tax is a compensation for the benefit of a lower tax rate granted to the subsidiary on the distributions), the problem arises, whether such supplementary tax may be charged where the subsidiary pays its dividends out of income exempt from tax by virtue of the Convention. Finally a similar problem may arise in connection with taxes (précompte, Advance Corporation Tax) which are levied on distributed profits of a corporation in order to cover the tax credit attributable to the shareholders (cf. paragraph 43 of the Commentary on Article 10). The question is whether such special taxes connected with the distribution of profits, could be levied insofar as distributions are made out of profits exempt from tax. It is left to Contracting States to settle these questions by bilateral negotiations.”

Paragraph 46 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 46 of the 1963 Draft Convention was amended and renumbered as paragraph 69 (see history of paragraph 71) and a new paragraph 46 was added.

Paragraph 47Amended on 23 July 1992, by replacing the references therein to paragraphs 70 to 76 with a reference to paragraphs 72 to 78, by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 47 read as follows:“47. In Articles 10 and 11 the right to tax dividends and interest is divided between the State of residence and the State of source. In these cases, the State of residence is left free not to tax if it wants to do so (cf.e.g.paragraphs 70 to 76 below) and to apply the exemption method also to the above-mentioned items of income. However, where the State of residence prefers to make use of its right to tax such items of income, it cannot apply the exemption method to eliminate the double taxation since it would thus give up fully its right to tax the income concerned. For the State of residence, the application of the credit method would normally seem to give a satisfactory solution. Moreover, as already indicated in paragraph 31 above, States which in general apply the exemption method may wish to apply to specific items of income the credit method rather than exemption. Consequently, the paragraph is drafted in accordance with the ordinary credit method. The Commentary on Article 23 B hereafter appliesmutatis mutandisto paragraph 2 of Article 23 A.”

Paragraph 47 of the 1977 Model Convention corresponded to paragraph 39 of the 1963 Draft Convention. Paragraph 47 of the 1963 Draft Convention was amended and renumbered as paragraph 70 (see history of paragraph 72) and the preceding heading was moved with it when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 39 of the 1963 Draft Convention was amended and renumbered as paragraph 47 of the 1977 Model Convention and the preceding heading was moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 39 read as follows :“39. In Articles 10 and 11 the right to tax dividends and interest is divided between the State of residence and the State of source. Such is also the case with respect to royalties, as regards Greece, Luxembourg, Portugal and Spain. As a consequence double taxation in these cases cannot be expected to be avoided by the application of the exemption method since this method secures that the State of residence gives up its right to tax the income concerned, but the State of residence is left free to apply the exemption method if it wants to do so. For the State of residence the application of the credit method would normally seem to give a satisfactory solution. Consequently, the paragraph is drafted in accordance with the ordinary credit method. If, however, a given Contracting State has a special tax system (e.g. Switzerland) where the tax credit method is not yet applied and where it therefore would be difficult to apply such method as provided for by paragraph 2 of the Article, such Contracting State may, in bilateral negotiations, use other measures in order to alleviate the double taxation mentioned in such paragraph 2.

Paragraph 48Amended on 15 July 2014, by removing the reference to paragraph 63 at the end of the paragraph, by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014. In the 1977 Model Convention and until 15 July 2014, paragraph 48 read as follows:“48. In the cases referred to in the previous paragraph, certain maximum percentages are laid down for tax reserved to the State of source. In such cases, the rate of tax in the State of residence will very often be higher than the rate in the State of source. The limitation of the deduction which is laid down in the second sentence of paragraph 2 and which is in accordance with the ordinary credit method is therefore of consequence only in a limited number of cases. If, in such cases, the Contracting States prefer to waive the limitation and to apply the full credit method, they can do so by deleting the second sentence of paragraph 2 (see also paragraph 63 below).”

Paragraph 48 of the 1977 Model Convention corresponded to paragraph 40 of the 1963 Draft Convention. Paragraph 48 of the 1963 Draft Convention was amended and renumbered as paragraph 71 (see history of paragraph 73) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 40 of the 1963 Draft Convention was amended and renumbered as paragraph 48 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 40 read as follows:“40. In the cases referred to in the previous paragraph certain maximum percentages are laid down for tax reserved to the State of source. In such cases the rate of tax in the State of residence will very often be higher than the rate in the State of course. Consequently, a limitation of the deduction in accordance with the ordinary credit method would have only a limited significance. If in such cases the Contracting States find it preferable to use the full credit method they can do so by deleting the second sentence of the paragraph.”

Paragraph 49Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 49 of the 1963 Draft Convention was amended and renumbered as paragraph 72 (see history of paragraph 74) and a new paragraph 49 and preceding heading were added.

Paragraph 50Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 50 of the 1963 Draft Convention was amended and incorporated into paragraph 73 (see history of paragraph 75) and a new paragraph 50 was added.

Paragraph 51Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 51 of the 1963 Draft Convention was amended and incorporated into paragraph 73 (see history of paragraph 75) and a new paragraph 51 was added.

Paragraph 52Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 52 of the1963 Draft Convention and the preceding heading were deleted and a new paragraph 52 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 52 and the preceding heading read as follows:“D. Special Credit With Respect to Dividends

52. Certain States wishing to apply the credit method allow in their Conventions, in respect of dividends received from companies in other States, credit, not only for the amount of tax directly levied on the dividends in those other States, but also for that part of the companies’ tax which is appropriate to the dividends. Member States applying this method are left free to do so.”

Paragraph 53Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 54Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 55Amended on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 55 read as follows:“55. The 1963 Draft Convention reserved expressly the application of the progressive scale of tax rates by the State of residence (last sentence of paragraph 1 of Article 23 A) and most conventions concluded between OECD member countries, which adopt the exemption method follow this principle. According to paragraph 3 of Article 23 A, as amended, the State of residence retains the right to take the amount of exempted income or capital into consideration when determining the tax to be imposed on the rest of the income or capital. The rule applies even where the exempted income (or items of capital) and the taxable income (or items of capital) accrue to those persons (e.g.husband and wife) whose incomes (or items of capital) are taxed jointly according to the domestic laws. This principle of progression applies to income or capital exempted by virtue of paragraph 1 of Article 23 A as well as to income or capital which under any other provision of the Convention “shall be taxable only” in the other Contracting State (cf. paragraph 6 above). This is the reason why the principle of progression is transferred from paragraph 1 of Article 23 A to a new paragraph 3 of the said Article, and reference is made to exemption “in accordance with any provision of the Convention”.”

Paragraph 55 and the preceding heading were added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 56Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 56.1Added together with the heading preceding it on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 56.2Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 56.3Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 57Corresponds to paragraph 41 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 41 of the 1963 Draft Convention was amended and renumbered as paragraph 57 and a new paragraph 57 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, the preceding headings were amended and moved with paragraph 41. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 41 and the preceding headings read as follows:“III. Comments on Article 23(B) (Credit)

A. Methods

41. Article 23(B) which embodies the credit provision, follows the ordinary credit method: The State of residence allows, as a deduction from its own tax on the income or capital of its resident, an amount equal to the tax paid in the other State on the income derived from, or capital owned in, that other State, but the deduction is restricted to the appropriate proportion of its own tax.”

Paragraph 58Corresponds to paragraph 42 of the 1963 Draft Convention as it read before 11 April 1977. On that date paragraph 42 of the 1963 Draft Convention was amended and renumbered as paragraph 58 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 42 read as follows:“42. The ordinary credit method is intended to apply, inter alia, to dividends and interest where the State of source has a limited right to tax, but the possibility of a certain modification is referred to under paragraphs 39 and 40 above.”

Paragraph 59Amended on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999). After 23 July 1992 and until 29 April 2000, paragraph 59 read as follows:“59. It is to be noted that Article 23 B applies in a State R only to items of income or capital which, in accordance with the Convention, “may be taxed” in the other State E (or S). Items of income or capital which according to Article 8, to paragraph 3 of Article 13, to subparagraph a) of paragraphs 1 and 2 of Article 19 and to paragraph 3 of Article 22, “shall be taxable only” in the other State, are from the outset exempt from tax in State R (cf. paragraph 6 above), and the Commentary on Article 23 A applies to such exempted income and capital. As regards progression, reference is made to paragraph 2 of the Article (and paragraph 79 below).”

Paragraph 59 was previously amended on 23 July 1992, by replacing the reference therein to paragraph 77 by a reference to paragraph 79, by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 59 read as follows:“59. It is to be noted that Article 23 B applies in a State R only to items of income or capital which, in accordance with the Convention, “may be taxed” in the other State E (or S). Items of income or capital which according to Article 8, to paragraph 3 of Article 13, to subparagraph a)of paragraphs 1 and 2 of Article 19 and to paragraph 3 of Article 22, “shall be taxable only” in the other State, are from the outset exempt from tax in State R (cf. paragraph 6 above), and the Commentary on Article 23 A applies to such exempted income and capital. As regards progression, reference is made to paragraph 2 of the Article (and paragraph 77 below).”

Paragraph 59 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 60Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 61Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 62Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 63Amended on 15 July 2014 by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014. In the 1977 Model Convention and until 15 July 2014, paragraph 63 read as follows:“63. The maximum deduction is normally computed as the tax on net income,i.e.on the income from State E (or S) less allowable deductions (specified or proportional) connected with such income (see paragraph 40 above). For such reason, the maximum deduction in many cases may be lower than the tax effectively paid in State E (or S). This may especially be true in the case where, for instance, a resident of State R deriving interest from State S has borrowed funds from a third person to finance the interest-producing loan. As the interest due on such borrowed money may be offset against the interest derived from State S, the amount of net income subject to tax in State R may be very small, or there may even be no net income at all. This problem could be solved by using the full credit method in State R as mentioned in paragraph 48 above. Another solution would be to exempt such income from tax in State S, as it is proposed in the Commentary in respect of interest on credit sales and on loans granted by banks (see paragraph 15 of the Commentary on Article 11).”

Paragraph 63 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 64Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 65Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 66Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 67Replaced paragraph 67 of the 1977 Model Convention as it read before 23 July 1992. At that time paragraph 67 was renumbered as paragraph 69 (see history of paragraph 69) and a new paragraph 67 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of paragraph 86 of a previous report entitled “Thin Capitalisation” (adopted by the OECD Council on 26 November 1986).

Paragraph 68Replaced on 23 July 1992 when paragraph 68 of the 1977 Model Convention was renumbered as paragraph 70 (see history of paragraph 70) and a new paragraph 68 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of paragraph 86 of a previous report entitled “Thin Capitalisation” (adopted by the OECD Council on 26 November 1986). At the same time, the heading preceding paragraph 68 was moved with it.

Paragraph 69Corresponds to paragraph 67 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 69 of the 1977 Model Convention was renumbered as paragraph 71 (see history of paragraph 71) and paragraph 67 of the 1977 Model Convention was renumbered as paragraph 69 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 67 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 69.1Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 69.2Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 69.3Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of Annex I of another report entitled “The Application of the OECD Model Tax Convention to Partnerships” (adopted by the OECD Committee on Fiscal Affairs on 20 January 1999).

Paragraph 70Corresponds to paragraph 68 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 70 of the 1977 Model Convention was renumbered as paragraph 72 (see history of paragraph 72) and paragraph 68 of the 1977 Model Convention was renumbered as paragraph 70 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. At the same time, the heading preceding paragraph 70 was moved with it and the heading preceding paragraph 68 was moved with it.

Paragraph 68 of the 1977 Model Convention corresponded to paragraph 45 of the 1963 Draft Convention. Paragraph 45 of the 1963 Draft Convention was amended and renumbered as paragraph 68 and the preceding heading was amended and moved with it when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 45 and the preceding heading read as follows:“B. Remarks Concerning Tax on Capital

45. Capital taxes are included in the present Article. As paragraph 1 is drafted, credit is to be allowed for income tax only against income tax and for capital tax only against capital tax. Consequently, credit for or against capital tax will be given only if there is a capital tax in both Contracting States.”

Paragraph 71Corresponds to paragraph 69 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 71 was renumbered as paragraph 73 (see history of paragraph 73) and paragraph 69 was renumbered as paragraph 71 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 69 of the 1977 Model Convention corresponded to paragraph 46 of the 1963 Draft Convention. Paragraph 46 of the 1963 Draft Convention was amended and renumbered as paragraph 69 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 46 read as follows:“46. Under bilateral negotiations, two Contracting States may agree that a tax called a capital tax is of a nature closely related to income tax and may, therefore, wish to allow credit for it against income tax and vice versa. There will be cases where, because one State does not impose a capital tax or because both States impose capital taxes only on domestic assets, no double taxation of capital will arise. In such cases it is, of course understood that the reference to capital taxation may be deleted. Furthermore, negotiating States may find it desirable, regardless of the nature of the taxes included under the Convention, to allow credit for the total amount of tax in the State of source against the total amount of tax in the State of residence. Where, however, a Convention includes both real capital taxes and capital taxes which are in their nature income taxes, the Contracting States may wish to allow credit against income tax only for the latter mentioned capital taxes. In such cases, Contracting States are free to alter the proposed Article so as to achieve the desired effect.”

Paragraph 72Replaced, together with the preceding heading, on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of another report entitled “Tax Sparing: a Reconsideration” (adopted by the OECD Council on 23 October 1997). After 23 July 1992 and until 29 April 2000, paragraph 72 and the preceding heading read as follows:“C. The relation in special cases between the taxation in the State of source and the ordinary credit method

72. In certain cases a State, especially a developing country, may for particular reasons give concessions to taxpayers,e.g.tax incentive reliefs to encourage industrial output. In a similar way, a State may exempt from tax certain kinds of income,e.g.pensions to war wounded soldiers.”

Paragraph 72 corresponded to paragraph 70 of the 1977 Model Convention as it read before 23 July 1992. On 23 July 1992 paragraph 72 of the 1977 Model Convention was renumbered as paragraph 74 (see history of paragraph 74), paragraph 70 of the 1977 Model Convention was renumbered as paragraph 72 and the heading preceding paragraph 70 was moved with it by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 70 of the 1977 Model Convention corresponded to paragraph 47 of the 1963 Draft Convention. Paragraph 47 of the 1963 Draft Convention was amended and renumbered as paragraph 70 and the preceding heading was moved with it when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 47 read as follows:“47. In certain cases a State, particularly a State which is commonly referred to as an industrially under-developed State, may for particular reasons give concessions to taxpayers, e.g. tax incentive reliefs to encourage industrial output. In a similar way, a State may wish to free from taxation certain kinds of income, e.g. pensions to war wounded soldiers.”

Paragraph 73Replaced on 29 April 2000 when paragraph 73 was deleted and a new paragraph 73 was added by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of another report entitled “Tax Sparing: a Reconsideration” (adopted by the OECD Council on 23 October 1997). After 23 July 1992 and until 29 April 2000, paragraph 73 read as follows:“73. When such a State concludes a convention with a State which applies the exemption method, no restriction of the relief given to the taxpayers arises, because that other State must give exemption regardless of the amount of tax, if any, imposed in the State of source (cf. paragraph 34 above). But when the other State applies the credit method, the concession may be nullified to the extent that such other State will allow a deduction only of the tax paid in the State of source. By reason of the concessions, that other State secures what may be called an uncovenanted gain for its own Exchequer.”

Paragraph 73 as it read after 23 July 1992 corresponded to paragraph 71 of the 1977 Model Convention. On 23 July 1992 paragraph 73 of the 1977 Model Convention was renumbered as paragraph 75 (see history of paragraph 75) and paragraph 71 of the 1977 Model Convention was renumbered as paragraph 73 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 71 of the 1977 Model Convention corresponded to paragraph 48 of the 1963 Draft Convention. Paragraph 48 of the 1963 Draft Convention was amended and renumbered as paragraph 71 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 48 read as follows:“48. When such a State concludes a Convention with a State which applies the exemption system, no restriction of the relief given to the taxpayers arises, because that other State must give exemption regardless of the amount of tax, if any, imposed in the State of source. But when the other State applies the credit system the concession is nullified, inasmuch as that other State will allow a deduction only of the tax paid in the State of source. Moreover, by reason of the concessions, that other State secures what may be called an uncovenanted gain for its own Exchequer.”

Paragraph 74Replaced on 29 April 2000 when paragraph 74 was deleted and a new paragraph 74 was added by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of another report entitled “Tax Sparing: a Reconsideration” (adopted by the OECD Council on 23 October 1997). After 23 July 1992 and until 29 April 2000, paragraph 74 read as follows:“74. Should the two States agree that the benefit of the concessions given to the taxpayers in the State of source are not to be nullified, a derogation from paragraph 2 of Article 23 A, or from Article 23 B will be necessary.”

Paragraph 74 as it read after 23 July 1992 corresponded to paragraph 72 of the 1977 Model Convention. On 23 July 1992 paragraph 74 of the 1977 Model Convention was renumbered as paragraph 76 (see history of paragraph 76) and paragraph 72 of the 1977 Model Convention was renumbered as paragraph 74 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 72 of the 1977 Model Convention corresponded to paragraph 49 of the 1963 Draft Convention. Paragraph 49 of the 1963 Draft Convention was amended and renumbered as paragraph 72 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 49 read as follows:“49. Should the two Contracting States agree that the benefit of the concessions given to the taxpayers in the State of source are not to be nullified, a deviation from Article 23(A) paragraph 2, and Article 23(B) will be necessary.”

Paragraph 75Replaced on 29 April 2000 when paragraph 75 was deleted and a new paragraph 75 was added by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of another report entitled “Tax Sparing: a Reconsideration” (adopted by the OECD Council on 23 October 1997). After 23 July 1992 and until 29 April 2000, paragraph 75 read as follows:“75. Various formulae can be used to this effect, as for example:the State of residence will allow as a deduction the amount of tax which the State of source could have imposed in accordance with its general legislation or such amount as limited by the Convention (e.g.limitations of rates provided for dividends and interest in Articles 10 and 11) even if the State of source, as a developing country, has waived all or part of that tax under special provisions for the promotion of its economic development;

as a counterpart for the tax sacrifice which the developing country makes by reducing in a general way its tax at the source, the State of residence agrees to allow a deduction against its own tax of an amount (in part fictitious) fixed at a higher rate;

the State of residence exempts the income which has benefited from tax incentives in the developing country.

Contracting States are free to devise other formulae in the course of bilateral negotiations.”

Paragraph 75 as it read after 23 July 1992 corresponded to paragraph 73 of the 1977 Model Convention. On 23 July 1992 paragraph 75 of the 1977 Model Convention was renumbered as paragraph 77 (see history of paragraph 77) and paragraph 73 of the 1977 Model Convention was renumbered as paragraph 75 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 73 of the 1977 Model Convention corresponded to paragraphs 50 and 51 of the 1963 Draft Convention. Paragraphs 50 and 51, as they read in the 1963 Draft Convention were amended and incorporated into paragraph 73 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraphs 50 and 51 read as follows:“50. One method of deviation might be that, where such “tax-spared” income is in question, the exemption method could, as pointed out in paragraph 48, be applied. Already, to cover special cases, a deviation from the exemption method, which embodies the credit method, has been proposed in paragraph 2 of Article 23(A), so that a deviation in this case from the credit method embodying the exemption method might be acceptable. Another deviation might be the adoption of what is called “matching credit”. This method secures that the State of residence will allow as a deduction from its own tax an amount corresponding to the tax which would have been paid in the State of source if no concession had been granted by that State. In order that the system should give satisfactory results, it is necessary that the State of source should be able to notify to the State of residence the amount of tax that would have been paid if no relief had been granted.

51. Member States are left free to settle in such cases whether deviations are to be made from the ordinary credit method, and, if so, what form the deviations are to take, and what conditions are to be fulfilled before the deviations.”

Paragraph 76Replaced on 29 April 2000 when paragraph 76 was deleted and a new paragraph 76 was added by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of another report entitled “Tax Sparing: a Reconsideration” (adopted by the OECD Council on 23 October 1997). After 23 July 1992 and until 29 April 2000, paragraph 76 read as follows:“76. If a Contracting State agrees to stimulate especially investments in the other State being a developing country, the above provisions will generally be accompanied by guarantees for the investors, that is to say, the Convention will limit the rate of tax which can be imposed in the State of source on dividends, interest and royalties.”

Paragraph 76 as it read after 23 July 1992 corresponded to paragraph 74 of the 1977 Model Convention. On 23 July 1992 paragraph 76 of the 1977 Model Convention was renumbered as paragraph 78 (see history of paragraph 78) and paragraph 74 of the 1977 Model Convention was renumbered as paragraph 76 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 74 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 77Replaced on 29 April 2000 when paragraph 77 was deleted and a new paragraph 77 was added by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of another report entitled “Tax Sparing: a Reconsideration” (adopted by the OECD Council on 23 October 1997). After 23 July 1992 and until 29 April 2000, paragraph 77 read as follows:“77. Moreover, time restrictions or time limits can be provided for the application of the advantages referred to in formula a), and possibly c), above: the extended credit (or the exemption) may be granted only in respect of incentives applied temporarily in developing countries, or only for investments made or contracts concluded in the future (for instance, from the date of entry into force of the Convention) or for a determined period of time.”

Paragraph 77 as it read after 23 July 1992 corresponded to paragraph 75 of the 1977 Model Convention. On 23 July 1992 paragraph 77 of the 1977 Model Convention was renumbered as paragraph 79 (see history of paragraph 79), the heading preceding paragraph 77 was moved with it and paragraph 75 of the 1977 Model Convention was renumbered as paragraph 77 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 75 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 78Replaced on 29 April 2000 when paragraph 77 was deleted and a new paragraph 77 was added by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of another report entitled “Tax Sparing: a Reconsideration” (adopted by the OECD Council on 23 October 1997). After 23 July 1992 and until 29 April 2000, paragraph 78 read as follows:“78. Thus, there exists a considerable number of solutions to this problem. In fact, the concrete effects of the provisions concerned can also vary as a result of other factors such as the amount to be included in the taxable income in the State of residence (formulae a) and b) above); it may be the net income derived (after deduction of the tax effectively paid in the State of source), or the net income grossed-up by an amount equal to the tax effectively paid in the State of source, or to the tax which could have been levied in accordance with the Convention (rates provided for in Articles 10 and 11) or to the tax which the State of residence agrees to allow as a deduction.”

Paragraph 78 as it read after 23 July 1992 corresponded to paragraph 76 of the 1977 Model Convention. On 23 July 1992 paragraph 76 of the 1977 Model Convention was renumbered as paragraph 78 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 76 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 78.1Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of another report entitled “Tax Sparing: a Reconsideration” (adopted by the OECD Council on 23 October 1997).

Paragraph 79Corresponds to paragraph 77 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 77 of the 1977 Model Convention was renumbered as paragraph 79 and the heading preceding paragraph 77 was moved with it by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 77 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 80Added, together with the heading preceding it, on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 81Amended on 15 July 2014, by changing the cross-reference, by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014. After 29 April 2000 and until 15 July 2014, paragraph 81 read as follows:“81. Switzerlandreserves its right not to apply the rules laid down in paragraph 32 in cases where a conflict of qualification results from a modification to the internal law of the State of source subsequent to the conclusion of a Convention.”

Paragraph 81 was added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 82Deleted together with the heading preceding it on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 29 April 2000 and until 17 July 2008, paragraph 82 and the heading preceding it read as follows:“Reservation on the Article82. Portugalreserves its position on paragraph 4 of Article 23 A.”

Paragraph 82 was added, together with the heading preceding it, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.